Your initial estate planning efforts may consist of nothing more than executing a Last Will and Testament that ensures your assets will be distributed according to your wishes in the event of your sudden death at an early age. You will, however, undoubtedly elaborate on that plan as you acquire more assets and as your family expands. Eventually, your estate plan will likely include a wide range of estate planning tools, one of which may be an incentive trust. The North Andover trust attorneys at DeBruyckere Law Offices explain why you might include an incentive trust in your estate plan.
What Is a Living Trust?
A trust is a fiduciary legal arrangement that allows a third party, referred to as a Trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. All trusts can be broadly divided into two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s (trust creator) Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason unless a court grants the right to revoke or modify the trust.
What Is an Incentive Trust?
Almost anyone can be the beneficiary of a trust, including entities such as a charitable organization or even your family pet. Often, however, the beneficiaries of a trust are the Settlor’s children and/or grandchildren. A trust is frequently used in lieu of, or in addition to, a Last Will and Testament as a mechanism to pass down an inheritance. When that is the case, a Settlor often chooses to make the trust an “incentive” trust.
Although we might all like to believe that our children or grandchildren will manage an inheritance with the utmost care and frugality, the reality is that if they are still relatively young when they receive that inheritance, they might not be particularly responsible with that money. Using a trust to pass down that money allows you to stagger the distribution of your child/grandchild’s inheritance instead of handing over a lump sum to a beneficiary who is not emotionally or practically ready to handle a large sum of money. Making that trust an incentive trust offers you and added layer of control.
The term “incentive trust” is an informal name given to a trust that encourages good behavior by the beneficiaries of the trust. Usually, an incentive trust is a revocable living trust; however, you could also use a testamentary trust or even an irrevocable living trust. A revocable living trust is usually chosen though because it offers you the ability to modify the terms of the trust while you are still alive. The terms of the trust are what make it an incentive trust because those terms are used to guide the behavior of the beneficiaries. A beneficiary will only receive disbursements if he/she does something, or refrains from doing something, that the Settlor deems important. For example, a beneficiary might only be entitled to receive disbursements from the trust if he/she maintains a specific grade point average in school. Incentive trusts are also commonly used to encourage beneficiaries to overcome addictions, settle down and start a family, pursue specific careers, or become involved in philanthropy. One of the primary benefits of creating a trust is the ability to create the trust terms. As the Settlor, you can include any terms you wish if they are not illegal, unconscionable, or impossible to fulfill. That means you can use your incentive trust to encourage or discourage any type of behavior that you feel is important enough to tie to an inheritance.
Contact North Andover Trust Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions about an incentive trust or incapacity planning in general, contact the North Andover trust attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.
Making a trust irrevocable is helpful if your goal is to protect assets because once assets are transferred into the trust they become the property of the trust and you have no legal right to control or access them.
Talk to your estate planning attorney about this before making a decision; however, appointing a profesisonal Trustee is often the best option if you have a sizeable trust and/or a trust with complex terms or assets.
You may want to pass down your beliefs, philosophies, and faith as well as your assets. If so, an incentive trust can help nudge your beneficiaries to adopt those beleifs, philospohies and faith.
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