Many parents and grandparents with significant wealth worry about the impact an inheritance might have on their heirs. Will the recipients use the funds wisely, or will they squander them on frivolous expenses like luxury cars, risky ventures, or even destructive habits? Others worry that a sudden influx of wealth might stifle their children’s or grandchildren’s ambition, making it harder for them to overcome life’s challenges or strive for success.

At the same time, these families want to create a safety net for their loved ones and enhance their quality of life in an increasingly unpredictable financial world. One popular solution is placing assets in a trust that distributes funds at specific milestones, such as one-third at age 25, another third at age 30, and the remainder at age 35.

However, for families with more targeted concerns or specific goals, incentive trusts offer a more tailored approach. These trusts go beyond simple distributions, providing instructions to the trustee on how and when to release funds. The aim is to encourage positive behaviors, like achieving educational milestones, and discourage unproductive or harmful activities, such as excessive spending or substance abuse.

How Incentive Trusts Can Be Structured

Incentive trusts can be highly customized, reflecting the values and priorities of the trust’s creator. Here are a few common ways these trusts are designed:

• Education Rewards: Financial bonuses for completing degrees or certifications.
• Matching Earnings or Savings: Matching employment income or savings to encourage responsibility.
• Funding Education: Covering costs for schooling, from college to trade programs.
• Charitable Giving: Requiring heirs to donate annually to a foundation or fund.
• Supporting Public Service: Matching earnings in nonprofit or public service careers.
• Milestone Rewards: Distributing funds for milestones like marriage, parenthood, or sobriety.
• Homeownership Assistance: Matching down payments on a house.

Through these structures, families hope to ensure their wealth supports productive, meaningful pursuits. While incentive trusts can extend the impact of an inheritance, they also raise questions about how much control the deceased should exercise over their heirs’ lives after they’re gone. Many families strike a balance, giving some funds outright while placing the remainder in a trust with specific guidelines.

However, crafting an incentive trust requires careful planning to avoid unintended consequences. The trust’s terms must be clear, enforceable, and compliant with public policy. For instance, courts have struck down clauses in trusts that impose restrictions deemed discriminatory or overly restrictive, such as disinheriting heirs for marrying outside a specific faith.

If you’re considering an incentive trust as part of your estate plan, it’s essential to work with an experienced elder law or estate planning attorney. These professionals can help ensure your trust aligns with your goals, values, and legal requirements while protecting your heirs and your legacy.

To explore whether an incentive trust is right for your family, contact us. We’ll help you create a plan that reflects your vision and secures your family’s future.