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Why would you use an incentive trust?

You know how an incentive trust works: Your heirs are given a set of conditions, which are sometimes viewed as goals. If they reach them, the trust pays out either in part or in full. This is different than many trusts that simply pay out at certain ages, regardless of all else.

So, why would you use one?

The reasons are different in every case, but it can help to look at some examples. Maybe you have a child who struggles to remain dedicated in school. You want him or her to get a graduate degree. If you're worried you'll pass away before it happens and your child will drop out of school to live off of your money, you may stipulate that no payments will be made until the child has that graduate degree.

You may also want the child to contribute money to charities. You could set the trust up so that it pays out double what the child gives away on a yearly basis. This gives the child incentive to give away more money, knowing he or she will be paid back. Yes, you could just set up a plan to give your own money to charities, but this allows your child to be involved in doing this work, which may be important to you.

These are merely two examples, but you can set up any sorts of incentives that you feel are important, from matching income to giving incentives to those who participate in the arts. Every family is different, but you should know all of the options that you have to distribute money from your estate.

Source: Business Dictionary, "Incentive Trust," accessed March 30, 2017

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