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How an Incentive Trust Can Influence Your Heirs

What can you tell me about creating an incentive trust? I have concerns about my heir’s financial management skills and would like them to meet certain requirements in order to receive distributions from my estate.

If you want to influence your heirs after you are gone, an incentive trust is an option to consider. But be careful how you construct it because it can cause unintended, unfair consequences. Here is how it work and tips to help you create one.

Incentive Trusts Basics

An incentive trust is an estate-planning tool designed to help encourage your heirs in a direction you desire when you are no longer around.

With an incentive trust, some or all of your assets are passed to the trust when you pass away rather than directly to your heirs. Your trustee is empowered to distribute funds from the trust only after your beneficiaries meet certain conditions you have specified in the trust.

For example, an incentive trust might encourage a beneficiary to graduate from college, enter a particular profession, get married or even have children. They could also reward beneficiaries who do charitable work or supplement the incomes of those who choose low paying, yet meaningful careers like teaching or social work. On the other hand, it could penalize beneficiaries by cutting off or decreasing distributions or placing restrictions on heirs who do not work.

These types of trusts can also have drawbacks. A poorly constructed incentive trust has a high risk of unintended consequences. For example, if your trust provides a financial incentive for your children to be employed full-time, but one of them gets sick or seriously injured in a car accident and cannot work, they would be unfairly punished unfairly.

Incentive trusts can also be costly to create. Prices vary depending on the state you live in and how sophisticated the trust needs to be. The cost of hiring an attorney to draft the trust can range anywhere from $1,500 to $5,000 or more.

There are also legal limits on what you can do with an incentive trust. While state laws vary, incentive trusts that encourage a beneficiary to join or leave a particular religion, leave a spouse or not marry at all, can be challenged in court with a higher likelihood of the court finding an issue with the provision.

How to Create a Trust

To create a solid incentive trust that accomplishes what you envision, you need to hire an estate-planning attorney who will include precise instructions that clearly spell out your wishes. You will also want to include language granting your trustee the right to use his or her discretion and that the trustee’s decisions should be final and binding.

This allows your trustee to make common sense rulings, which will reduce or eliminate the chances of unintended and unfair consequences. It also makes it very difficult for beneficiaries to successfully challenge the trust or trustee in court. When a trust grants final decision-making authority to its trustee, it becomes difficult for beneficiaries to successfully argue that the trustee is not correctly implementing the trust’s terms.

The key is to select a trustee who is savvy enough to interpret your intent and possesses resilience enough to assert the trust terms when dealing with beneficiaries. You should also select a successor trustee if your first choice can no longer serve. Fees paid to a trustee vary widely depending on the state’s fee schedules, the size and complexity of the trust and who serves as trustee.

Creating an effective incentive trust that is representative of your wishes and provides flexibility for unforeseen situations can involve some complexity. To find an experienced attorney who can assist you in drafting an incentive trust, explore online resources to locate a professional in your area.

Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living" book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization's official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.

Published November 24, 2023

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