Clearly outline what you want to achieve with the incentive trust. Image: Sergio Delle Vedove/Shutterstock.com
By: FEDweek StaffSo-called “incentive trusts” offer rewards to trust beneficiaries who accomplish certain goals. With such a trust, beneficiaries might receive particular amounts for getting higher education degrees, attaining certain levels of earned income, serving in the community, etc.
For example, you might state that the trustee will distribute to each of your grandchildren a certain percentage (say, 25 percent) of earnings each year, up to $25,000.
Another approach is to leave such distributions to the discretion of the trustee.
The trust might indicate what types of activities will be rewarded, then allow the trustee to make appropriate distributions. For this type of arrangement to succeed, it is especially important that you choose a highly-qualified trustee.
Clearly state the conditions under which the beneficiaries will receive trust distributions. These conditions should be specific, measurable, and achievable. Your attorney can help craft these provisions to ensure they are legally enforceable.
The trustee (perhaps a relative, a friend, or a professional advisor) must be able to empathize with your beneficiaries yet make prudent decisions about distributions. Moreover, you should include a plan for trustee succession, in case your first choice becomes unable or unwilling to serve.
Setting up an incentive trust
Clearly outline what you want to achieve with the incentive trust. Common objectives include encouraging educational attainment, promoting responsible financial behavior, or motivating beneficiaries to pursue certain careers or personal goals.
Work with an estate planning attorney to draft the trust document. This should include the trust’s terms, conditions, and the specific incentives you wish to set. For example, you might specify that a beneficiary must graduate from college to receive a portion of the trust funds or maintain employment for a set number of years.
You’ll of course need to transfer assets into the trust, and that could include cash, stocks, real estate, or other valuable property.
Inform the beneficiaries about the trust’s existence and the conditions attached to it.
Periodically review the trust to ensure it continues to align with your objectives and adjust as necessary. Life changes, such as alterations in financial situations or family dynamics, may warrant updates to the trust terms.
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