Leaving someone an inheritance can always change their life in certain ways. If you leave a beneficiary $200,000, even if you just give them the money directly, it will give them a lot of options. People may use the money to start a business, buy a home or save for retirement.
But if you want to have influence over the choices a beneficiary makes, even after you pass away, one potential option is to use an incentive trust. By doing this, you may be able to incentivize them to make specific choices or meet certain goals.
Why would this be beneficial?
For example, maybe you want to encourage the person to get a college education. Their incentive could be graduation. You could put the $200,000 in a trust and tell them that they can use the money after they graduate from college.
Incentive trusts are sometimes used by those who are going to leave a significant amount of assets to their beneficiaries, such as financial assets that are worth millions of dollars. Wealthy individuals are often worried that beneficiaries will simply live off of the money, and they want to incentivize them to have productive and fulfilling lives.
An example of this could be if that beneficiary works as an artist or an entertainer. These can be difficult ways to make a living, so having an annual distribution from a trust may be a way to help them pay their bills and make ends meet. But you could set up the trust to say that they can only take those distributions as long as they are still working as an artist, incentivizing them to work hard in their career. This could prevent them from simply retiring early from that career and living off of their inheritance—but it still gives you a way to financially support them for years to come.
These are just a few examples of how an incentive trust could be used, but they highlight why it is important to know exactly what legal options you have when making an estate plan.
