Every parent wants their child to succeed and do well in life. To help steer a child towards or keep a child on what a parent considers to be the right path, a parent may offer an incentive to help a child out financially. For example a parent may agree to pay a college-bound son or daughter a monthly stipend provided that he or she maintains a certain GPA. These types of incentive or conditional arrangements are fairly common between parents and children. What happens, however, if a parent dies and is no longer able to provide the nudge in the right direction that a child may need to achieve his or her goals.
For parents who wish to leave money to a child, yet also want some control over when and if that money is distributed, an incentive trust may be a good option. As the name suggests, an incentive trust provides a beneficiary with financial payouts provided that he or she meet certain terms or conditions.
Incentive trusts are often established by parents who want to have some degree of influence or control over a child to ensure that he or she accomplishes certain goals. Additionally, this type of trust can also be used to deter a child from engaging in or pursuing certain behaviors, lifestyles or careers.
For example, a parent may fund an incentive trust which provides a provision stating that the trust’s funds will pay out double a child’s annual salary if he or she becomes a teacher or works for a nonprofit. The same type of trust can also be established to discourage a child from using drugs or not working and choosing instead to live off of the trust’s funds.
Whatever the circumstances, parents who wish to establish an incentive trust are advised to seek the advice and assistance of an attorney. If not careful, the actions of well-meaning parents could end up having a negative influence over and impact on a child’s life for decades to come.
Source: Barron’s, “Incentive Trusts Can Keep Your Heirs Motivated,” Amy Feldman, May 17, 2015