An incentive trust is any trust that rewards beneficiaries with distributions for desired behavior. They are popular for people who fear that their heirs will waste a large inheritance. Below are some tips if you are considering setting up an incentive trust.
Incentive trusts sound like a great idea to many people. We want our heirs to do good things with their lives and not receive a large inheritance only to blow the money on wasteful things.
For example, if you are creating a trust for a minor child, you might want to create a trust that rewards the child for graduating from college or getting a job.
Not all incentive trusts are created equally, however, and it is important to set one up properly or it is likely to fail.
Recently the Wills, Trusts & Estates Prof Blog published some tips in an article titled "Use An Incentive Trust to Make Sure Beneficiaries Stay On The Up And Up."
The tips include:
- Decide whether you want to create specific things for beneficiaries to perform to receive distributions or if you want to leave everything up to the discretion of the trustee.
- Determine whether payments should be made directly to the beneficiary or to a third party. For example, if the trust is to provide money for school, should the trustee distribute that money to the school in the form of tuition or give it to the beneficiary to pay the school?
- Decide how long the trust should exist. You can keep the trust in place for the beneficiary's entire life or you can set the trust to terminate at a certain point.
- Decide what will happen to the trust assets if the beneficiary does not live up to expectations.
- Make sure that all key conditions are spelled out in the trust.
It is important to note that some courts will not enforce incentive trusts that require actions that are against public policy, such as requiring a person to marry a person of a certain race or religion.
When it is all said and done, it's the family you're planning for in the first place. Therefore, in order to plan properly, first you need to understand your family. Proper planning ought to include discussing these issues with your family and then making the final decisions. Communication is key. We've said it before, proper planning starts with a thorough understanding of your needs, goals, dreams and aspirations. It takes into account your Values not just your Valuables. It starts with a thorough understanding of your family – those who you care about and who will someday receive the benefits of your success – and your family's dynamics. Let's work together to implement an estate plan that works for you. Remember, good planning is no accident.