Mar 6, 2018

Parenting from the Grave - Incentive Trusts

When you sit down to discuss your estate plan with your spouse and attorney, it is important to decide not only how your loved ones will receive your assets, but also why.


Most of us choose to think that our heirs will be responsible enough to handle any inheritance we pass down to them.  However, the reality is that many children and young adults are not quite ready for the responsibilities and pressures that come with inheriting any amount of wealth.  A great way to ensure your heirs handle their inheritance responsibly to implement guidelines by way of an incentive trust.  

An incentive trust is structured much like other trusts in that it is set up by you, the grantor, for the benefit of another party, the beneficiary.  The difference is that an incentive trust is designed to provide distributions only once certain behaviors and conditions are met.   In other words, distributions have strings attached.  Having string attached to the disbursement of assets is a powerful motivation for young heirs.  

Almost any condition can be set in an incentive trust.  Your attorney can include various creative provisions to meet many of the goals you have for your loved ones.  The only restriction imposed on the grantor is that anything deemed against public policy (restrictions on marriage, religious beliefs, for example) will not be legally recognized and will therefore be void. 

For those who have concerns that an inheritance may pacify the ambitions of heirs, incentive trusts present a solution to this problem.  A common tool utilized with incentive trusts is to include an income-matching provision.  Income-matching encourages heirs to be financially successful in their own right, while allowing them to live comfortably above their earnings.  If you are concerned that a child may not appreciate the value of an education, a grantor may dictate that college tuition can only be earned when specific grades are achieved.  Some grantors chose to include regular drug tests be administered to heirs before receiving their gifts, while others give the discretion of that requirement to their trustee.

An incentive trusts retains the ability to devise outright gifts without conditions attached.  In other words, conditions are optional and do not need to be attached to every disbursement made.  Grantors still have the option for traditional gifts at certain milestones – upon graduation, as a down payment for a house, etc..

In order for your incentive trust to be successful, it must be drafted with some flexibility in mind.  A well-written, yet inflexible document may result in the exact opposite result you envisioned.  For example, what if your child chooses to skip the traditional college route, but instead dreams of attending culinary school, or a dance academy?  If your goal is to have your child educated in whatever discipline they choose, having a rigid structure to the trust may deny this.  Therefore, it is crucial to have a trustee – whether it be a friend, family member, or third party like a bank - in place who has the power of flexibility when performing their fiduciary duties.  Appointing a trustee with the power to exercise discretion over disbursement decisions may be the best tool you can rely on to fulfill the spirit of the trusts.


In order for an incentive trust to achieve your desired goals, it must be clear and concise without overstepping on individual liberties.  Keep in mind that a document that inspires your loved ones, rather than one that attempts to control them will yield the best result for your family.   

Metro Detroit Mommy Blogger:

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