To create a successful estate plan that will truly accomplish everything you want it to, you will likely need to incorporate a wide range of interconnected estate planning tools and strategies into your plan. One of the most common additions to a comprehensive estate plan is a trust. There are several different categories of trusts and numerous specialized trusts within each category. Let’s see how an incentive trust can be used to encourage a beneficiary to use an inheritance the right way.
Trust Fundamentals
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also called a Maker, Grantor, or Trustor who transfers property to a Trustee chosen by the Settlor. The Trustee holds that property for the trust beneficiaries. The beneficiary of a trust can be an individual, an entity (such as a charity or political organization), or even the family pet. A trust must have at least one beneficiary but may have an unlimited number of beneficiaries.
All trusts can be broadly divided into two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason unless a court grants the right to revoke or modify the trust.
What Is an Incentive Trust?
The term “incentive trust” is an informal name given to a trust that encourages good behavior by the beneficiaries of the trust. Usually, an incentive trust is a revocable living trust; however, you could also use a testamentary trust or even an irrevocable living trust. A revocable living trust is usually chosen though because it offers you the ability to modify the terms of the trust while you are still alive. The terms of the trust are what make it an incentive trust because those terms are used to guide the behavior of the beneficiaries. A beneficiary will only receive disbursements if he/she does something, or refrains from doing something, that the Settlor deems important. For example, a beneficiary might only be entitled to receive disbursements from the trust if he/she maintains a specific grade point average in school. One of the primary benefits of creating a trust is the ability to create the trust terms. As the Settlor, you can include any terms you wish if they are not illegal, unconscionable, or impossible to fulfill.
Using an Incentive Trust to Direct How an Inheritance Is Used
Although we would all like to believe that our children and grandchildren will do the right things without our “encouragement,” the reality is that sometimes they need incentive. Hence the need for an “incentive” trust. Ways in which you might use an incentive trust include:
- Education. If higher education is important to you, your trust could require a beneficiary to attend a specific school, major in a specific field, maintain a specific G.P.A. or graduate by a specific age.
- Addiction. If a beneficiary has a history of alcohol, drug, or gambling addition, you could make distributions contingent on staying away from the vice.
- Family. If continuing your bloodline is of great concern to you, you could tie distributions from the trust to marriage and/or the birth of a child.
- Philanthropy. Reward a beneficiary for engaging in charitable activities by matching contributions or allowing distributions to supplement the income of a beneficiary who chooses to work for a non-profit or volunteer for free at a charity.
Contact Us
Please download our FREE estate planning checklist. If you have additional questions or concerns about an incentive trust, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.
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