Incentive Trusts: Encouraging Responsibility

It is perfectly natural for parents to wish to provide financially for their children where they possibly can. There are a number of methods by which this can be achieved, each of which has its own advantages and disadvantages. However, the use of a trust is one potential course of action that should be considered.

'Trust fund children' have been seen in a very negative light; the phrase is frequently accompanied by preconceptions of entitlement. However, establishing a trust to attempt to give financial security to your offspring can be very attractive in some circumstances. In the first instance, an income derived from a trust has the potential to be better structured than irregular payments made by a parent.

Furthermore, it ensures that the boundaries and timings of these payments are set. This can be useful on several fronts; it ensures that both parent and child are aware of their respective situations, and it presumably mitigates the possibility of arguments.

Encouragement and Incentive

Incentive trusts offer a means by which continued financial support can be made contingent upon the fulfilment of certain requirements. These trusts allow the settlor (that is, the individual establishing the trust) to encourage certain behaviours through financial incentive; if the intended beneficiary does not fulfil certain criteria then they will not receive payment.

In many cases, the requirements attached to incentive trusts are academic. It might be, for example, that regular payments (or a lump sum payment) will only occur if the beneficiary completes their A Levels or GCSEs. This can be particularly important in cases in which the trust is of a very high value; the attainment of certain academic standards is thought to be the first step to encouraging the beneficiaries to work, even if they might not have to when they inherit.

It is certainly true that this sort of arrangement can be reached between donor and beneficiary without the necessity for a trust. However, the use of a trust has several advantages. In the first instance, the legal codification of the agreement helps to ensure that its terms are respected and understood by both parties. Furthermore, a trust means that the agreement will continue unhindered in the event of the death of the settlor or trustee.

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Disadvantages

There are, however, a number of potential downsides to the use of incentive trusts. Generally, the conditions set by the settlor relate to easily quantifiable things like academic results or the following of a certain career path. If, however, the settlor's and beneficiary's wishes are divergent, the terms of the trust can create resentment on the part of the beneficiary. As such, wherever possible it is desirable for all concerned parties to have some say in the process of writing the trust instrument.

If you think that an incentive trust is the right tool in your situation, your next step should be to seek independent advice from a solicitor. The establishment of these trusts can be fairly complex, and it is important that the document is prepared properly. As such, professional help should always be sought.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our Estate Planning Checklist lets you tell us about your circumstances and get a personalised estate planning checklist covering wills, trusts, and inheritance tax. Try it now →