Your incentive trust must address things beyond the incentives

| May 26, 2019 | Firm News

With an incentive trust, you essentially put a carrot out there to try to entice your heirs to live the way you prefer. You want to give them incentives to accomplish worthwhile goals. You reward them with their inheritance the same way you reward children for doing their chores by giving them an allowance.

For example, maybe you want your child to have a good job and a good career. You worry that they don’t have the motivation to do it. You also worry that leaving them an inheritance gives them a way out of employment; they can just live off of your money. Since that’s not the life you want for them, you set up a trust that only pays out 5% of the inheritance per year, for 20 years, and they only get paid if they maintain employment during the year.

In theory, that sounds great. It can work. However, you need to make sure you look beyond the incentives and consider the way life could play out.

Going to school

For instance, what if your heir has not yet finished school when you pass away? They have a lot of bills, but they still have two years of school. They would not qualify for the incentive trust without a full-time job. Do you want to put in a provision allowing it to pay out if they’re taking classes?

Injuries and disabilities

Another thing to consider is the potential for an injury or a disability. If you’re setting up the trust for 20 years — or any amount of time, really — there’s a chance that your heir could get hurt and find themselves unable to work. Clearly, you still want to support them. The incentive trust needs to address this possibility.

Economic changes

Then you get into a bit of a gray area. What if they simply can’t find a job? Maybe they’re looking, but a recession hits, and the number of jobs to choose from dwindles to nothing. They’re not choosing unemployment. Do you still want the trust to pay out?

This is a gray area, though, because it’s unclear how hard they’re looking, how many jobs there are or what other options they have. Is the recession really to blame? If you make it too easy for them to get the money without a job, does that undermine the entire goal of the incentive trust?

Your options

This isn’t to tell you what to do, but to show you the types of questions you need to ask. The right solution is different for everyone. Just make sure you carefully think through all of your legal options in Florida.