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Including an Incentive Trust in Your Estate Plan

Including an Incentive Trust in Your Estate Plan

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An incentive trust is used to provide incentive to the beneficiary of a trust to do something, or to refrain from doing something. An incentive trust, established by Illinois estate attorneys, may provide a good way for heirs to make important decisions and lifestyle changes that will impact their future.

Establishing an Incentive Trust

Fearing a generation of trust-fund kids without jobs, responsibilities or obligations, many families are establishing incentive trusts for beneficiaries as part of their estate plan. To encourage or discourage certain behaviors, incentive trusts come with strings attached, and distributions are tied to specific conditions that must be met, most commonly educational, employment, and behavioral changes for the beneficiary. Examples often include:

  • Attending a specific college
  • Maintaining a certain grade average during college
  • Graduating from college with an undergraduate or graduate degree
  • Pursuing a specific career path or achieving career goals
  • Doing charitable and/or non-profit work
  • Avoiding drug, alcohol and gambling addictions

Incentive trusts for education can pay for college or provide funds upon graduation. Some families with children or grandchildren who are fighting addiction often use an incentive trust as motivation for beneficiaries to complete a rehabilitation program and stay clean.

Incentive trusts can be tied to all types of beneficiary incentives, but careful drafting through estate attorneys is critical to establish clear guidelines. A simple incentive trust can be drafted to match a beneficiary’s annual income using federal tax forms as proof. A more complex incentive trust may offer to double a beneficiary’s salary who chooses low-paid or non-profit employment that’s socially valuable. In most incentive trusts, employment restrictions typically end at a certain age.

Verification of Trust Guidelines

The governing party of an incentive trust should recognize that the trustee may need to have access to records or documents to verify that trust guidelines are met by beneficiaries. Examples of such records or documents often include the beneficiary’s college transcripts, W-2 forms, federal and state income tax returns, medical records, and/or urine and blood analysis when addiction is suspected.

An incentive trust should clearly state that the beneficiary must willingly provide or fully cooperate with the trustee in obtaining such records or documents. It’s essential that the beneficiary of an incentive trust emphatically understands the guidelines and the consequences of failing to meet such guidelines. To protect beneficiaries, an incentive trust should also account for unforeseen or unexpected circumstances including serious accidents and injuries, physical and/or mental illness, diseases, disabilities, and death.

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