Question: What is an incentive trust?
Answer: Incentive trusts are in large part what they sound like; namely, trusts that give beneficiaries an incentive to act, or not act, in a particular way.
I find that interest in these types of trusts, in general, arise from people who want to ensure the well being of a child or other beneficiary as opposed to an intent to penalize.
In using incentive type trusts as part of the estate plan, the hope is to motivate a beneficiary to achieve a goal or objective of the person establishing the trust for them. Examples might include making honor roll, graduating from college, maintaining a perfect GPA, or even getting married. By contrast, beneficiaries with substance abuse problems or difficulty staying in school may risk losing the ability to request disbursements from a trust (this is the disincentive).
Do incentive trusts work?
It depends. I admit that these types of trusts can work, but situations can change rapidly and can be totally unpredictable by the time the trust comes ‘on line’. A grandparent who tries to incentivize a child and get them through college may be disappointed when college wasn’t the best plan and going to trade school or something else may have been a better option.
Comment: A better approach to an incentive trust may be to name a trusted individual with good judgement who can manage a trust using their discretion in making distributions to the trust beneficiaries.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
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Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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