Trusts make a good investment vehicle for those in the higher income brackets. However, all trusts are not equal, although they perform the same basic functions.
Today, we will discuss incentive trusts and the pros and cons of funding one.
What are the pros?
We’ve all heard the derogative term, “trust fund babies” used to refer to the idle rich young crowd who spend their time riding around in cars that cost more than some houses and going through thousands in bottle service and VIP access at the hippest clubs around.
An incentive trust can put the brakes on just that kind of lifestyle. The trust grantor (you) funds the trust principal as usual. But rather than unfettered access to its principal, beneficiaries can only get disbursements from the trustee you choose.
You can link the disbursements to life achievements like graduation from college and obtaining higher degrees, marriage, the birth of children and even age milestones. You could even insist on random drug or alcohol testing to keep addicts living a sober lifestyle.
And the cons?
Not everyone has the ability or inclination to go to college. What if a grandchild decides to enter the military or join the Peace Corps and build houses in war-torn villages? Should they be denied their inheritance because they took different but still honorable paths?
Suppose they never marry or cannot have or want children. Surely you don’t want ill-suited parents to keep giving birth in order to get their inheritance.
Finally, such trusts can be viewed as a form of “dead-hand control” by the trust grantor, wherein the deceased person attempts to control the lives of their children and grandchildren long after they have passed away.
There are many estate planning options
It is very important to have an estate plan in place. But by learning as much as you can about the options available to you, you are better poised to make the best decisions for all involved.