Incentive trusts are used to give heirs goals and to make sure they don't just live off of a large inheritance without doing anything for the rest of their lives. The wealthy often worry that their children won't be productive after they pass away, so they use trusts that only pass on their assets when certain goals are met.
These goals vary considerably from one case to the next, but a lot of them focus on employment. As long as the person has a good, productive career, the trust will keep paying. This gives the person a nice annual boost in income without leading to premature retirement.
However, the trust has to address all potential issues to make sure it works properly. Six questions to ask when drafting it include:
- What if the heir stays in college or goes back to school? You don't want the trust to automatically cut off because your child opts for an education.
- What if the heir decides to become a stay-at-home parent and drops out of the workforce?
- What if the heir gets a serious illness or suffers an injury, leading to disability?
- What if the heir does not work in order to care for an aging family member or another family member with a disability?
- What if the heir puts in significant time as a volunteer for a cause he or she is passionate about, even though it doesn't pay a salary?
- What if the economy crashes, the heir loses his or her job, and finding a new job proves impossible?
Now, a trust can be written to address each of these issues in turn, but this just shows why it's so important to understand the legal process and to carefully consider all of your options.
Source: The Balance, "Do Incentive Trusts Work?," Patti Spencer, accessed Feb. 15, 2018