When you evaluate your estate and recognize the fact that you are in a position to provide inheritances for your loved ones that will have life changing impact, you invariably feel a sense of profound responsibility. It is not as easy as simply handing over a large sum of money and letting the rest take care of itself. Having no financial motivations in life can prevent people from reaching their true potential at best and pave the way toward a self destructive or purposeless existence at worst.
There are no easy answers and nobody can make all of their loved ones’ decisions for them, but there is an estate planning tool that can provide at least a partial solution. Incentive trusts have been used successfully for generations as a way to guide people toward fruitful actions and away from damaging behavior.
The way that they work is that you fund the trust, appoint a trustee, and name your beneficiary, but you also include stipulations that you build into the trust agreement. So for example, you can make distributions available to your heir after every college semester that has been successfully completed with a lump sum reward upon graduation. If you wanted to foster a work ethic after college, you could further stipulate that the trust will pay out a dollar to your heir for every dollar he or she earns on her own.
One can also use a trust to discourage self-destructive behavior. Let’s say you have an heir who has a history of substance abuse. You could stipulate that this person must complete a rehabilitation program and undergo ongoing testing as a condition for receiving distributions from the trust.
The benefits of incentive trusts are self evident, but there are pitfalls as well. This hypothetical family member who is required to go to treatment and submit to testing may resent this, rebel, and fall deeper into addiction. On the other hand, the incentive trust may save his or her life. There is a delicate balance there, and it is advisable to proceed with caution and with the knowledge that the incentive trust is indeed a tool that is available to you.