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Should you fund an incentive trust for your beneficiaries?

When you do your estate planning, one topic that you might want to explore further with your estate planning attorney is funding an incentive trust. There are pros and cons associated with this decision, so it's wise to mull over all of your options.

An incentive trust is sort of the middle ground between unfettered access to an inheritance and the more restrictive spendthrift trusts. It can be a useful motivational tool, especially when the trust grantor has younger heirs who are just starting out on life's path.

The fact is that many otherwise responsible people struggle with money-management skills. These abilities can be honed over time, however, and that is one way that an incentive trust can be quite helpful.

Trust grantors can fund incentive trusts that disburse funds to beneficiaries when they hit certain milestones and goals. Although in no way inclusive, below are some typical benchmarks.

  • College graduations
  • Acquiring advanced degrees like MBAs, MDs and JDs
  • Marriages
  • Births of children
  • Landmark birthdays, e.g., 25th, 30th, 40th, etc.

Incentive trusts can also be used to limit undesired actions and to reward desirable intentions. For instance, suppose there is a family business. An heir who enters into a partnership with the business could be rewarded with a hefty disbursement.

But this can backfire spectacularly if one heir has their heart set on another sort of career entirely. Suppose your granddaughter chose to be a ballerina in a dance troupe rather than the comptroller for the family winery or your son entered the military and didn't become a doctor as you had hoped.

Do you really want to penalize them from beyond the grave for following their hearts with their life choices?

It's a lot to parse all at once. Your California estate planning attorney can break down all of your options and help you make the choice that is best for you and your beneficiaries.

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