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The pros and cons of an incentive trust

An incentive trust appeals to you. Your two children are very different. While your daughter is well-grounded and you have no doubt she will spend her inheritance wisely, your younger son is far different. He has always spent money quickly and made frivolous purchases that you did not approve of.

When it was his own money, that was one thing. When it becomes your money, that's something else entirely. You worry that he'll end his own career and spend years wasting what you worked so hard to earn. You want to set up an incentive trust so that he only gets his inheritance by hitting milestones: graduating from college, starting a company, earning a certain amount per year. If he works hard, he gets more. You must keep him motivated in a way your daughter does not need.

Below are some pros and cons to consider:

Pros

You can encourage wise spending. An incentive trust that pays at graduation gives him a way to pay off student loans instantly. He'll be motivated to finish up his degree and not drop out, knowing he won't have any debt if he does so.

You can keep him working. Connecting his annual payouts to his salary means he has to have a job. He's not just going to "retire" at 29 years old. He's going to work. Plus, the more he earns and the harder he works, the more the trust pays out.

You can promote healthy lifestyle choices. For instance, if you worry about drug and alcohol use, you could make it so that the trust pays out if he's never arrested for a DUI or marijuana possession. If he is, he forfeits the money for that year. Money is a great motivator in all areas of life.

Cons

Your son may resent you. After all, you are quite literally trying to control his life even after you pass away. He may especially be resentful if you leave your daughter a lump sum, knowing that she does not need the incentive trust. Siblings desperately want things to be fair, even if it's not what is best for them.

You may also set up incentives that prove to be impossible. You need to take all potential life changes into account. For instance, if you tie the payouts to his salary and then he suffers an injury that makes it impossible for him to work, do the payouts stop? You may say "of course not," and that's fine, but you must make sure the trust really reflects your wishes.

Your options

Incentive trusts are not for everyone. However, they can be helpful, and this shows you why it's so important to consider all of your options.

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