An incentive trust, which is also known as an equal opportunity trust, is a legal concept that ensures one’s descendants will wisely use their inheritance. It is designed to minimize the waste or destruction of generational wealth which sometimes occurs when children or grandchildren are given unfettered access to the assets of their parents and grandparents.
Why Are Such Incentive Trusts Used?
A common phenomenon that is seen in families of all cultures and nationalities is a parent or grandparent who works hard and diligently to build the family’s fortune, only to have their descendants squander it. Incentive trusts are designed to prevent this by only distributing funds based on desirable behavior while denying access to such funds when the behavior of one’s forebears is undesirable.
Examples of How Incentive Trusts Operate
Incentive trusts are extremely powerful because they give wealth builders the ability to control their wealth and influence the behavior of their descendants even after they’ve passed away. Examples of this include:
- Reinforcing education
A trustee is only allowed to distribute funds when a beneficiary has earned certain academic achievements, such as graduating from college or earning a certain grade point average. Furthermore, you can specify earning a degree in a certain area such as medicine, math, science, or engineering to discourage your descendants from trying to earn a degree in a less challenging area such as humanities or liberal arts.
- Reinforcing work ethic
Those that want to discourage laziness in their forbears can do so by arranging trust distributions so that they match the annual salary of the beneficiary. This encourages them to earn as much money as possible through their own efforts after which they will be paid out of the trust. You can also distribute funds based on profession, such as becoming a public servant or entering the military.
- Reinforcing philanthropy
Those that prioritize philanthropy and charity work can arrange their trusts in a way where beneficiaries will only be paid based on the funds they give to charity. You can specify the exact charity which is preferable to many wealth builders as it discourages selfishness in their descendants and the importance of helping others.
- Reinforcing missionary work or service
If you wish to help your heirs find the joy in serving others you can arrange the trust to distribute funds for service trips, missions and other related goals. You may also wish to require some service or missionary work be performed before a distribution in any amount be released.
Additional Advantages of Incentive Trusts
In addition to the benefits listed above, there are other advantages you’ll gain from these trusts. When properly arranged they will empower your family for generations to come, because you can discourage the common behaviors which often destroy generational wealth, such as excessive spending.
A fortune that took decades to build can be ruined within months by ungrateful descendants who waste it, so incentive trusts can be used to restrict spending in various ways. For instance, if your children or grandchildren want to purchase a car, the trust can stipulate that they must come up with fifty percent of the cost up front and verify it before the other half will be distributed to them. The trust can also discourage drug or alcohol usage or be set to only distribute funds to descendants who are employed and can demonstrate such.