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What are the downsides to an incentive trust?

There are many positive reasons to use an incentive trust. You can encourage your heirs to be successful, for instance, and you can ensure that they only get the money when they are mature and responsible enough to handle it.

However, before deciding to use this kind of trust, you do want to consider the downsides. What are the potential negative impacts of the incentive trust?

First of all, your incentives may not match up with what your heirs feel passionate about. For instance, you may want your child to start their own business. Your child, however, wants to work for a nonprofit helping those in need. Should the child get less money for pursuing this goal? You want to consider all the ramifications of an incentive trust and how they can push your heirs toward a certain path.

Another potential downside is that your heirs may not be happy that you created the trust, feeling like it is too controlling. Rather than leaving a lasting legacy, you could just cause some resentment. Consider your heirs' wants and needs when setting up the trust, and design it to help them be successful, not purely to control them.

Furthermore, your incentives may not be realistic. For instance, what if you set one incentive as finishing grad school, but your heir lacks the money to attend or simply does not excel at school and is not the best fit for a graduate program? Some parents, while trying to help their children do their best, accidentally push them too far.

If you are considering a trust for your heirs or are someone who is the beneficiary of a trust, it's important to understand how trust work. Everything from how it was designed, what goals it sets and the legal constraints on the assets are important factors to assess. An attorney can help you better understand your rights and options.

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