Incentive versus spendthrift trusts: What is the difference?

On Behalf of | Apr 23, 2022 | Trusts

If you have put off drafting your estate plan due to some complex situations involving your future beneficiaries and heirs, it is not too late to take control of the situation now. The problem might be that some potential beneficiaries may not be able to successfully manage the sum of money you plan to leave them when you pass.

You also don’t want to destroy any motivation they might have to work hard and live up to their full potential despite the inheritance you plan to leave them. The good news is that you have some ready options at your disposal.

Consider funding a trust

Many trusts provide beneficiaries with ready access to the principal. This could potentially allow them to raid the trust and deplete the principal. There are also trusts that only pay disbursements to beneficiaries when they complete the terms of the trust that you determine during your lifetime.

So, what are they and how do they work?

Introducing an incentive trust

Incentive trusts are good options when your heirs and beneficiaries are young and without a lot of life experience. You may want them to finish post-secondary education or even go on to get a Juris Doctorate or an MD. 

You could fund a trust that incentivizes them to continue their education and even to achieve a certain grade point average (GPA) to qualify for disbursements.

The disadvantages to this are that your actions can be perceived as “dead-hand control” exerted on the beneficiaries from beyond the grave. While you will be gone by then, it could tarnish your memory.

Spendthrift trusts address other issues

Another type of trust you might consider funding is known as a spendthrift trust. This differs from an incentive trust in that the beneficiaries don’t have to meet certain criteria to get disbursements from the fund. 

However, a trustee you name is in charge of making the payments to the beneficiaries so they do not deplete the principal or act otherwise irresponsibly. Your financial and legal advisers can help you choose which type of trust best meets your and your loved ones’ needs.