Parents sometimes worry about the effect an inheritance is going to have on their children. For instance, wealthy parents sometimes say that they think their children may “forget the value of hard work.” Perhaps their child has a lucrative career right now, but the parent is worried that they will just stop working and live off of the inheritance once they receive it.
If you’re in this position and you want to ensure that the beneficiary stays motivated, there are some tactics you can use to do it. One of them is to create an incentive trust.
How does this type of trust work?
Essentially, this is just a trust that only allows payouts when certain goals or incentives are met. You get to choose these goals when you create the trust, and you inform the trustee about them so they know when to make distributions.
In this hypothetical example, you may want to say that your child can make one annual withdrawal from the trust. The amount that they can take out is the same as the amount of pretax income that they earn over the year.
In this way, you give your child an incentive to continue working and to advance in their career. If they stop working entirely, they can’t make withdrawals from the trust. If they hardly work at all, they can take some money out, but it may not be enough to live off of. Conversely, if they work hard and get raises and promotions, their annual distributions go up as well – giving them the ability to live in a wealth bracket well above their actual earnings.
This is just one example of how you can ensure that your inheritance helps and does not hinder your beneficiaries. Make sure you know what steps to take when making the estate plan.