Friday, October 07, 2011

What is an Incentive Trust?

By Susan M. Graham, Certified Elder Law Attorney, Senior Edge Legal, Boise, Idaho

An inheritance of cash can be good or bad.  The "good" part is easy.  Someone receives the inheritance and uses the funds wisely to enhance their lives.  The "bad" part is often swept under the rug.

If someone inherits money and that person is young emerging into adulthood, likes to spend money freely with no sense of tomorrow, has an addiction problem or has trouble holding down a job, his or her inheritance is likely to evaporate.

An Incentive Trust may be the solution to help a child who is a reckless spender.  How does such a Trust work?  The parents need to sit down with their attorney and discuss the needs and abilities [and shortcomings] of their child.  Between them they can craft a Trust that will provide for the child's future in a constructive way.  Frequently a professional Corporate Trustee (such as a Bank Trust Department) will be the Trustee to co-Trustee with the child.  You don't want to make a family member a Trustee because that will poison the relationship between that person and the child.  Incentive Trusts frequently include a method to help educate the child to manage money responsibly so that he or she can develop the skills to take over their own finances in the future.  These trusts can work if they include objective standards and are transparent so the Trustee knows what the beneficiary is doing and the beneficiary knows the standards used for measurement.

Your other choice is to give the money outright with a "wish and a prayer" that it will all work out, knowing in your hear that result is unlikely.