You can use a lot of different types of trusts when doing your estate planning. For instance, if you have an heir with special needs, you may consider a special needs trust to give them financial help without making it so they can't get government assistance. If you have an heir who is under 18, you may consider an age-based trust so that they do not get the money until they are old enough to handle it.
As you consider all of your options, one thing you want to think about is an incentive trust. Here's what it is, how it works and why it can help.
The main point of an incentive trust is to set goals. They can be very specific or more generalized, but you want to tie the inheritance to those goals.
Often, the reason people decide to use an incentive trust is because they have enough money that their children would not have to work. They do not want them to lose all ambition in life. They know that giving them a lump sum when they pass away could very well do that. The incentive trust can change things dramatically.
For instance, if a parent wants to make sure a child keeps working, they could make the "incentive" earning a salary. Every year, the trust pays out to the child the same amount that they earn at their job. This gives them an incentive to earn as much as possible, so they will still apply themselves to their career. If they don't, they get very little -- or nothing at all -- from the trust.
Parents will sometimes pick more concrete, one-time goals as well. The incentive could be that the child gets the money when they graduate from college or start their own business. Again, the parent gives the child goals, but it's not a long-term arrangement. It still makes the child work hard toward a goal that the parent thought was important.
These trusts can also work well for careers that may not pay much. For instance, maybe the parent does not want to simply leave an aspiring artist all of their money and have them give up on art. Instead, they can set it up so that writing a book or having a gallery showing for their paintings each year triggers the trust, which pays them $100,000. The child makes a nice living even if their art doesn't bring in that money, but they still have to keep making the art to get the money.
Setting it up
Not every family needs an incentive trust, but it is a creative way that some parents approach estate planning. If you want to use it, make sure you know what steps you should take.