Some individuals who decide to use incentive trusts are interested in promoting “moral” behavior.
For instance, the trust could be set up to pay a child $50,000 annually. However, it only pays out if the child stays within the guidelines specified in the trust. If not, that year’s payment is withheld and the child has another chance the following year.
One key, if you’re thinking of setting up this type of system, is to be specific. List out exactly what behaviors you’re trying to prevent. Simply saying that “immoral behavior” violates the trust is problematic because that’s a subjective concept. What some people consider immoral is not frowned upon at all by others.
In many cases, parents are worried about children breaking the law. For instance, perhaps a child has already gotten a pair of DUIs. The parents have been able to prevent further instances, but they want to make sure the child continues to refrain from drinking and driving after they pass away. Putting that type of clause in the trust is simple. If the child gets arrested for a DUI within the calendar year, the payment is withheld.
Now, you may be thinking that the child could still drink and drive and get paid if he or she is never caught, and that’s true. However, the trust can still reduce the odds. Is the child going to risk it with $50,000 on the line, or is he or she going to call a cab?
This is just one example, but it helps to show you how inventive and flexible trusts can be. Make sure you know all of your options during the estate planning process.
Source: Investopedia, “Encouraging Good Habits With An Incentive Trust,” Stan Murray, accessed Feb. 27, 2018