Incentive Trusts: Using Your Legacy to Benefit Your Loved Ones

Leaving someone an inheritance is not as simple as adding some zeros to his or her bank account balance. It can be…but this is not always in the best interests of your loved ones. It’s likely that some of your heirs are mature and established with a history of being able to handle their own affairs appropriately, and you may have no concerns about them. But you may also have some younger heirs who have not yet made their marks in life, or some family members who have personal problems or a history of handling money unwisely. This can make you take pause when you are engaged in the process of inheritance planning.

An estate planning vehicle that many people who are having these types of concerns choose to utilize is the incentive trust. These trusts operate like any other, where you name a beneficiary to receive distributions out of the trust and a trustee to handle the funds. But the difference lies in the fact that you include stipulations in the trust agreement that must be met before distributions will be made in an effort to guide your heir toward positive choices.

One example of how an incentive trust might be used would be to encourage your heir to get a good education. You could stipulate that distributions from the trust will be made as long as this individual is a student in good standing at an accredited college or university. One may choose to offer additional lump sum contributions each time your heir obtains a degree.

You can place any stipulations you want to on the distributions, and many people will use these trusts to discourage self destructive behavior in their family members. You may require drug testing of an heir who has a history of abuse, or open up ongoing distributions only after your heir quits smoking.

Incentive trusts are not the right choice for every situation because many people would prefer not to be forced to do things they may or may not want to do in order to receive their inheritances. But, these trusts are something that is available to you and they may provide you with the solution you are seeking for a particular heir or heirs.

Careful planning is required if incentive trusts are selected.  Work with an experienced and qualified estate planning attorney to be sure your goals are met.

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Timothy P. Murphy

Timothy P. Murphy is an estate planning and elder law attorney whose practice emphasizes helping people to build, preserve and pass on their wealth. He works with his clients to accomplish their goals while avoiding unnecessary court proceedings and minimizing or eliminating exposure to death taxes.

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