Incentive Trust Basics

Considering the legacy you wish to leave your loved ones is a big idea to grapple with when you are estate planning. While you may be certain that you want to provide financial resources to your beneficiaries after you pass away, you may worry about how they will spend the inheritance you have left them. This is a valid concern as you likely have spent your life building these assets and resources and would hate to see them misspent or quickly whittled away as your heirs spend away their new found wealth and become distracted from the goals you would want them to achieve. In this situation, establishing an incentive trust may assuage your fears and anxiety over what could happen after you pass away, when you are not there to guide your loved ones on the right path.

Incentive Trust Basics

An incentive trust is just like any other trust in that it is established by a grantor, managed by a trustee, and funded by transferring asset ownership over to the trust itself. The defining detail of an incentive trust is that it places contingencies on trust distributions. In other words, certain specified conditions that are set forth by the grantor in the trust document must be met before the trustee can make distributions to the trust beneficiaries. The trustee must act as the gatekeeper and work to ensure that the wishes of the grantor, the conditions placed on trust distributions, are properly satisfied prior to distributing funds from the trust to the trust beneficiaries.

Some grantors of incentive trusts may have been worried that an inheritance may prove distracting for a beneficiary and lead them astray from their goals. With an incentive trust, the grantor can still provide an inheritance to a beneficiary, but instead of distracting them from their goals, they can incentivize reaching those goals with receiving the inheritance. For instance, an incentive trust may condition trust distributions on the beneficiary:

  • Being awarded a degree
  • Earning a professional certification
  • Purchasing a home
  • Becoming involved in the community and other philanthropic endeavors
  • Retaining gainful employment
  • Starting a family

You see, with an incentive trust, you can tie trust distributions to a variety of achievements. You can also pace distributions to be made over time, as opposed to all at once, to help avoid a beneficiary quickly spending away trust funds. These are some of the big advantages of establishing an incentive trust. You encourage your heirs to achieve certain goals, to remain focused on accomplishing certain things that you prioritize for them.

One of the disadvantages is, of course, that some beneficiaries may get very angry and frustrated with having such conditions placed on receiving their inheritances. Much of this, however, can be assuaged by open and candid conversations with your beneficiaries about your intentions behind establishing the incentive trust. Talk to them about why the incentives are important to you. You should also have this discussion with the person who will be appointed trustee. It is important that your trustee also have a clear understanding of your intentions behind the trust. This will help them in working to ensure that trust distributions are made when trust conditions have been met in accordance with your intentions.

Estate Planning Attorneys

If you are interested in establishing an incentive trust as part of your comprehensive estate plan, the dedicated estate planning attorneys at Jones, Gregg, Creehan & Gerace can make that happen for you.  Contact us today.