When you are deciding how you would like to pass on your assets to your heirs it may be very cut and dried when it comes to older, established family members. But when you have heirs who are younger and still developing, and/or loved ones that have difficulties handling money, you may take pause. How do you provide for those who may not be ready to handle a large inheritance without any guidance? One way this can be accomplished is through the creation of incentive trusts.
Incentive trusts could be tersely and rather bluntly described as “inheritances with strings attached.” With these vehicles you appoint a trustee and name a beneficiary, and while you are drawing up the trust agreement you include stipulations that must be met before distributions from the trust can be approved by the trustee.
These stipulations serve as incentives that can either guide an heir toward positive behavior or lure a family member away from self destructive behavior. For example, you might state that the beneficiary of the trust will receive distributions while they remain a student in good standing at an institution of higher learning. One might choose to instill a work ethic in a loved one by providing for distributions from the trust that match each dollar that he or she earns while pursuing a career.
The possibilities are endless and limited only by your own creativity. These trusts are not going to be necessary or appropriate in the majority of cases, but they do indeed serve a useful purpose in some instances.