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Understanding incentive trusts

As a reasonably well-to-do Illinois resident, you likely have your years of hard work and your sound money management to thank for the wealth you have accumulated. Naturally you want to pass on that wealth to your children and grandchildren, but you may hesitate to do so by means of your will and/or the common types of trusts with which most people are familiar.

For instance, what if one or more of your children or grandchildren has shown that (s)he does not handle money well? Or what if you want to leave all of them enough so that they can choose what they want to do with their lives, but not so much that they may choose to do nothing at all? If you have these or other concerns about your children and/or grandchildren, setting up incentive trusts for them could be just the answer.

How an incentive trust works

As its name implies, an incentive trust gives the trust beneficiary an incentive to do what you want him or her to do before (s)he gets the trust proceeds or a portion thereof.

Illustrative examples

For example, say you feel strongly that all of your children and grandchildren should obtain college educations or even graduate school degrees. You can structure the incentive trusts so that the beneficiaries receive half the trust proceeds once they graduate from college and the other half when they obtain their post-graduate degree.

Or say you believe that too much money in the hands of a very young adult makes for a dangerous situation. You could structure the incentive trusts so that the beneficiaries receive one-third of the trust proceeds when they reach 25 years of age, another third when they reach age 30, and the final third when they reach age 35.

Naturally, you cannot require your trust beneficiaries to do anything illegal or immoral in order to receive their inheritances. But other than that, you can pretty much structure the incentives as you wish.

Bear in mind that some people view incentives as a way for someone to “rule from the grave.” However, only you know your motives for setting up one or more incentive trusts. Hopefully, you do not seek to run your children’s and grandchildren’s lives for years to come. Rather, you seek to incentivize your beneficiaries to do what is best for them.

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