When you become a parent, you soon learn how to motivate your child. If you have more than one child, you will notice that each responds best to different types of motivation. Creating an incentive trust is one form of motivating your children. However, while it works for some children, it might not work for others.
How does an incentive trust work?
If you want to leave assets to your child, you can use them to persuade your child to take a particular action. If they do not fulfill the requirements set down, they do not get the money.
Incentive trusts can work. They could be the push your daughter needs to buckle down and qualify as an attorney. Yet maybe the reason your daughter is not knuckling down is that she does not want to be a lawyer. Perhaps she only chose that course of study to please you. By refusing to give her the inheritance unless she qualifies, you could be setting her up for a life of regret and bitterness.
The other potential problem is that by tying the transfer of assets to a specific requirement, you could stop your child from accessing money if they desperately need it. Imagine five years after your death, and your grandchild is lying in a hospital bed needing expensive treatment. The money in the incentive trust would cover it. Yet, because your daughter failed their bar exam, she cannot access that money to pay for the treatment.
While incentive trusts have a place in estate planning, you need to think carefully about the real reason you wish to use one. Are you using it to motivate your child to create a better life for themselves? Or are you using it to bribe them into doing what you want?
