Should I fund an incentive trust?

Adults of all ages can benefit from establishing trusts for the assets they plan to leave to their heirs. But there are multiple types of trusts, and no one-size-fits-all version to fit every circumstance.

Estate planners sometimes recommend incentive trusts to their clients. Would this type of trust be helpful in your situation? Read on to find out.

What is an incentive trust?

This is one estate-planning tool that can be a strong motivational factor to help keep beneficiaries on a steady life path after you are no longer alive to influence their decisions. These trusts work by stipulating certain conditions that must be met in order for beneficiaries to receive distributions from the trust.

Who needs this type of trust?

Not everyone will need to consider funding an incentive trust, but if your heirs’ career or educational trajectories have not been consistent, they may need this motivation. Here’s one way it could work:

Suppose you have a 22-year-old grandson who has not made the most of the opportunities that have come his way. He got the boot from some of Georgia’s finest institutions of higher learning due to his unwillingness to buckle down and hit the books.

He hasn’t done well outside of academia, either, preferring to drift from one dead-end job to the next. He barely earns enough to get by and depends upon frequent hand-outs to get out of hot water. You’re worried that unfettered access to a lump sum of money could be his undoing.

The benefits of incentive trusts

You could fund an incentive trust stipulating that in order to receive any distributions, your grandson must do the following:

  • Graduate from college or university
  • Complete an MBA or obtain a law degree
  • Remain gainfully employed in his chosen field

If your grandson lacks the aptitude for such lofty ambitions, you could scale it back some, perhaps listing incentives that are associated with other milestones in life, e.g., significant birthdays, marriage and the birth of children.

Disadvantages of these trusts

You could tarnish your memory as a benevolent grandparent and instead be remembered as quite controlling, despite your good intentions. There is also the possibility that unfortunate circumstances could befall your progeny that leave them unable to fulfill the terms of the trust, and thus, to receive any disbursements.

This could be mitigated by having your Georgia estate planning attorney include a clause stating that certain stipulations be waived in the event of illness or disability.

Make the decision that’s right for your heirs

You should take the time to assess and evaluate your potential heirs and beneficiaries when deciding whether a spendthrift trust will be the best approach. Remember, too, that there is no substitute for honest communication about your intentions.

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Kevin Tharpe

With 25 years of experience, Kevin understands how estate planning, special needs planning, and government benefits programs work together. This is a crucial element of a thorough plan. He explains your eligibility for benefits programs and ensures that you do not make costly mistakes that may disqualify you or deplete your assets.

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