Many parents who use incentive trusts want to make sure that their heirs still have gainful employment. For instance, a parent may know they could leave their child enough money to live off without working. They don’t want the child to lose all motivation, though, so they set up an incentive trust that pays out just 10% every year, but only when the child has been employed for the entire year.
The need for flexibility
This idea sounds great on paper, and it can be executed in a way that helps the child have the life you want for them. But you must consider flexibility. You can’t always predict what will happen, so making a blanket condition in the trust about necessary employment is dangerous.
For instance, what if your child stays employed for the first three years of the trust, but then they get involved in a serious car accident. They’re disabled and can no longer work. According to the terms of the trust, they stop getting their inheritance.
Or, say that your child gets married, has children, and decides that their dream is to be a stay-at-home parent. It’s more work than actually having a job, but, since they’re not technically employed, they stop getting the money from the trust. Do you actually want to cut them off from that inheritance while they raise a family? It’s pretty clear that was never your goal — but not according to the terms of the trust.
Creating the right trust
You have to bring this mindset to your estate planning if you’re going to create a plan that works. Make sure you carefully consider all of the options you have. An experienced advocate can often guide you through potential pitfalls when it comes to establishing workable trusts for your heirs.
