There are many ways to use a trust to distribute assets to your beneficiaries. One of the main reasons people do this is that they want to have control over when the beneficiary receives the money and what conditions have to be met.
Often—especially with wealthy families—a concern is that someone who receives a trust fund may start living off of that money and not work hard to be productive in their career. Parents may want to avoid this outcome for their adult children. One way to do it is by tying an incentive trust to the earned income during the year.
How does this work?
Say that a parent is leaving a child a trust fund with $2 million, but they want to make sure that the child doesn’t quit their job and attempt to live off of that money.
Instead of giving them the $2 million directly, they put it in an incentive trust. Every year, the child can take one annual distribution from the trust.
But the amount that they get is directly connected to their earned income for the year. If they only make $20,000 that year, they can only take out another $20,000, for a total of $40,000. But if they get a promotion or a raise and they make $100,000, then they can take another $100,000 from the trust, giving them a cumulative total of $200,000.
Not only does this mean that the child has an incentive to work hard and earn more, but it still gives them the ability to live above their means. They are effectively doubling their income. At the same time, parents can still be assured that the child will keep working—because, if they were to quit their job and have no income for the year, they wouldn’t be allowed to access the trust.
This is just one example of how you can use a trust in an estate plan. Take the time to carefully look into all of your legal options.
