One of your primary estate planning goals may be to ensure that you leave behind sufficient assets to provide for your loved ones when you are gone. You may also wish to have some continued influence over your loved ones, even in your absence. Let’s explore how you can use a trust to control the assets you gift.
A trust is a fiduciary arrangement that allows a third party, referred to as a Trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the 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.
Almost anyone can be the beneficiary of a trust, including entities such as a charitable organization or even your family pet. Often, however, the beneficiaries of a trust are the Settlor’s children and/or grandchildren. A trust is frequently used in lieu of, or in addition to, a Last Will and Testament as a mechanism to pass down an inheritance. When that is the case, a Settlor often chooses to make the trust an “incentive” trust.
Using an Incentive Trust
When gifting assets in your estate plan, it is in your best interest to be honest with yourself when evaluating a beneficiary’s ability to handle an inheritance. If a beneficiary is still relatively young at the time, they receive that inheritance, they might not be particularly responsible with the money. Using a trust to pass down that money allows you to stagger the distribution of the inheritance instead of handing over a lump sum to a beneficiary who isn’t ready to handle a large sum of money. Making that trust an incentive trust offers you the added benefit of being able to influence your beneficiary’s behavior even after you are gone.
An “incentive trust” is simply a trust that encourages the beneficiaries of the trust to engage in specific behaviors. 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 gets accepted into a specific college or graduates with a specific grade point average. Incentive trusts are also commonly used to encourage beneficiaries to overcome addictions, settle down and start a family, pursue specific careers, or become involved in philanthropy. As the Settlor of the trust, you create the trust terms, which means you can use your incentive trust to encourage or discourage any type of behavior that you feel is important.
Please download our FREE estate planning checklist. If you have additional questions or concerns about using a trust to control assets you gift, contact us at the Northern California Center for Estate Planning & Elder Lawby calling (916)-437-3500 or by filling out our online contact form.