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The dangers of using incentive trusts

When you leave your money and assets to your loved ones, you may want to inspire them to do something in their lives that you believe would make it better for them in the long run. Perhaps during your life, those same individuals failed to take your advice and experience to heart.

Now that you have the means to do so, you may want to tie an inheritance to the completion of some task that you think will improve the lives of your loved ones. If that is the case, you may create an "incentive" trust, which puts conditions on whether a beneficiary receives distributions from it.

Some roadblocks to address in an incentive trust

Your loved ones lead their own lives, which means that they could go down any number of paths, either of their own volition or due to circumstances beyond their control. For instance, if you want a family member to find gainful employment of a particular type, this could backfire due to the following possibilities:

  • An injury or illness leads to a disability that precludes obtaining specific employment.
  • The individual cannot gain access to distributions to pay for schooling that leads to the profession.
  • Your loved one decides to stay home to raise his or her children.
  • Your family member decides to care for an aging parent.
  • Your family member decides that doing volunteer work is more important.
  • An economic recession could limit the number of available positions in a profession.

It's impossible to know what could happen in the future, so it may help to address these and other issues in the trust. Allowing a trustee to make informed decisions based on the circumstances at the time a distribution could occur may also help. You could provide some parameters for those decisions, of course. Obviously, you would not want distributions made in the absence of a compelling reason. Your trustee may need some liability protection from upset beneficiaries as well.

You may also want to choose your conditions carefully. It may not be possible to legally uphold some of them. For instance, you may not be able to require someone to get a divorce, marry someone in particular or practice a certain religion. Before drafting an incentive trust, you may want to find out what you can and can't legally require and how to correctly word the trust in order to help ensure the trustee and beneficiaries can honor your wishes.

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Leonard F. Berg, Attorney at Law