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The big reason an incentive trust may not work

When people talk about incentive trusts, they often point out the benefits: You get to help your heirs become the best versions of themselves, and then they get their inheritance when they follow the path you set for them. Incentives could include refraining from illegal drug use, getting a college education, starting a business, starting a family and much more.

That sounds good, but these trusts are complicated and may have unintended consequences if you don't really think through the potential outcomes. What if something you didn't expect keeps the person from meeting the conditions of the trust? For instance, if the condition says they have to graduate from college and then they suffer a brain injury in a car accident, do they not get the inheritance? Certainly, that's not what you want, but it may be what happens.

"These tend to be the things that become arguments, where a court has to decide what was the settlor's intent," said one expert in an interview with Barron's. "Did they really mean that if the child was on drugs, the trustee wasn't allowed to pay for that person to have a roof over their heads? You can see where a slippery slope can form."

Remember, there's no way to revise this after you pass away. You don't get a second chance to analyze the situation and make a logical decision. The court has to decide what you would have chosen, and there's no guarantee they'll do it correctly. In the end, your money may get used in ways you never intended.

This doesn't mean you shouldn't use incentive trusts. You just have to be careful. Trusts are very useful, powerful tools for estate planning. Be sure you know what options you have and that you carefully weigh the pros and cons of each.

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