You’ve worked hard all your life to build a financial legacy to leave to your children and grandchildren. One concern you might have is making sure your beneficiaries understand and carry on the values you’ve lived by and tried to instill in your family. Another concern might be making sure that your beneficiaries manage their inherited wealth wisely.
An incentive trust might be the way to address these concerns. An incentive trust is not a separate type of trust, it’s just a trust with provisions in it that encourage certain desired behavior, and discourage other behaviors. So, instead of instructing your trustee to distribute funds to your beneficiaries on a set schedule, or leaving distributions up to the trustee’s discretion, you’ll condition distributions on the reaching of certain milestones or the meeting of certain goals.
For example, education is a popular subject for incentive trusts. If you’re concerned about your children or grandchildren completing college or graduate school, you can condition their receipt of trust funds on graduation, or even on enrollment for a certain number of hours per semester while maintaining a certain grade point average.
Employment is another common concern, and many incentive trusts condition the distribution of funds on the beneficiaries’ employment, or even employment in a specific field or profession. If gainful employment is your concern, you can establish an incentive trust that matches a beneficiary’s income each month or year.
Discouraging unwanted behavior is another potential use for an incentive trust. For example, if you have a beneficiary with a drug or alcohol problem, you can condition distribution of funds on completion of a rehab program or abstaining from using drugs.
The goal in establishing an incentive trust is to word the trust agreement so that it is objective and effective. An estate planning attorney can help you to do this, and can guide you in making sure that the incentives you include in your trust are within the bounds of the law.
Stephen A. Mendel, Estate Planning Attorney
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