Should I Use Incentive Trusts in My Estate Plan?

As you approach the often-difficult topic of estate planning, it is understandable that you want what is best for your heirs—especially if they are your children or grandchildren. We would like to believe that our descendants will be responsible and mature enough to handle a sizeable inheritance, but deep down, we know that this is not always the case. Some people simply struggle to establish healthy spending habits, and for these people, money tends to burn a hole in their pocket.

As an estate planning attorney, I am often asked by clients about the best ways to leave assets to heirs who lack proper financial responsibility. These clients are afraid that their hard-earned property will be spent frivolously, but they do not want to cut their heirs off entirely. In some cases, an incentive trust may offer a possible solution, but it important to be careful when creating the trust’s terms.

What Is an Incentive Trust?

An incentive trust is a financial tool that allows you as the creator of the trust to establish rules and conditions regarding how the trust’s assets will be distributed to heirs and beneficiaries. Such conditions are generally intended to encourage positive and healthy behaviors while discouraging and effectively punishing apathy and destructive behaviors.

Incentive trusts commonly include conditions related to:

• Age: You may wish to delay disbursements from the trust until your heirs reach a certain age. As your heirs get older, they are more likely be better suited to handle more money.
• Education: You could make distributions contingent on your heirs completing high school or college, and maintaining a particular grade point average.
• Employment: An incentive trust could limit disbursements to heirs who maintain gainful employment. You could even increase distributions for those who take lower-paying, service-oriented jobs at schools or non-profits.

Potential Dangers

It is possible that using incentive trusts could create a level of resentment among your heirs, especially if the terms of the trust seem unreasonable to them. There is also the possibility that the trust can be declared void if its provisions violate public policy. Courts are likely set aside conditions that:

• Place restraints on marriage, including whether or not to marry or whether an heir marries a spouse of a particular race
• Encourage divorce or family division, including incentives for breaking off an unapproved relationship. Conditions intended to provide for post-divorce support may be valid
• Religion, including any conditions that address an heir’s worship or demonstrations of faith
• Illegal activity, including incentives that promote illicit behavior or hinder creditors.

Well-intentioned conditions regarding alcohol or drug use can also become problematic as they may cross the line into violations of your heirs’ privacy.

Many estate planning experts recommend that if you are going to use an incentive trust, you should give fairly wide discretion to your chosen trustee rather than relying on specific mandates. This allows for more flexibility and could reduce possible confusion among your heirs.

We Are Here to Help

If you are in the process of estate planning and would like to know more about incentive trusts, contact an experienced Naperville estate planning attorney. We will meet with you to discuss your goals and help you find the right tools to achieve them. Call 630-756-1160 for a confidential consultation at the Gierach Law Firm today.

Sources:

Barrons

Investopedia