3 ways to use an incentive trust

You have a lot of options when using a trust as part of your estate plan. It gives you flexibility and the power to have a say in your estate after you pass away. Just leaving $500,000 to your kids means they can do whatever they please with it, but putting it in the trust means they acknowledge and respect your desires.

One way to do this is with an incentive trust. It can actually control whether or not the kids get the money, and when they get it. In this way, you can help shape their lives and influence them with your assets. Below are three examples of ways you can do it.

Earnings

One of the most common ways to use an incentive trust is to tie it to earnings. You don't want your child to give up his or her career, taking the inheritance and retiring. You can set up the trust to pay the child however much he or she earns during the year. This pads the child's wallet and allows for a more luxurious lifestyle, but it means employment is always required.

Finishing School

Perhaps you're worried that your heirs don't have the dedication to get through college -- with or without the money. If they get that money, you have serious fears that they'll just waste it. The trust can get set up to pay out only when they finish their education. They'll feel a lot more inspired to get to graduation if they know their graduation present is $500,000.

Staying Out of Trouble

You may also want to consider changing someone's lifestyle with the trust. Perhaps an heir has been arrested or accused of using illegal drugs. You could set the trust up so that it pays out a percentage annually, but all payments get cut off after an arrest.

There are two upsides here. For one thing, you may convince the person to stay out trouble and change how he or she lives. Plus, you know that your money won't get used for illegal activity. You will only finance a lifestyle that you approve of.

Legalities

Incentive trusts can get tricky. You can't do anything illegal, naturally, or anything that won't get enforced in court. For example, perhaps you don't like a child's spouse. You can't set up an incentive trust that pays out only in the event of a divorce. However, you could set up a trust that protects the inheritance money if your child does get divorced, keeping half of the money from going to the spouse.

As such, it's very important to know the ins and outs of the legal system. You must construct the trust properly so that it holds up in court as your estate gets distributed.

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