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Do I Need an Incentive Trust?

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One of your primary reasons for creating an estate plan may be to ensure that you leave behind sufficient assets that your loved ones are well cared for when you are gone. Simply leaving considerable money or assets directly to loved ones without retaining any control over how those assets are used may not sit well with you. If so, an incentive trust may be the solution. An Essex Junction trust attorney at Unsworth LaPlante, PLLC explains why you might want to incorporate an incentive trust into your estate plan.

Trust Basics

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. A trust is a fiduciary 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 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.

Why Might I Need an Incentive Trust?

When gifting assets in your estate plan, it is in your best interest to be honest with yourself when evaluating a beneficiary’s ability to handle an inheritance. If a beneficiary is still relatively young at the time, they receive that inheritance, they might not be particularly responsible with the money. Using a trust to pass down that money allows you to stagger the distribution of the inheritance instead of handing over a lump sum to a beneficiary who isn’t ready to handle a large sum of money. Making that trust an incentive trust offers you the added benefit of being able to influence your beneficiary’s behavior even after you are gone.

What Is an Incentive Trust?

An “incentive trust” is simply a trust that encourages the beneficiaries of the trust to engage in specific behaviors. 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 gets accepted into a specific college or graduates with a specific grade point average. 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.  As the Settlor of the trust, you create the trust terms, which means you can use your incentive trust to encourage or discourage any type of behavior that you feel is important.

Contact an Essex Junction Trust Attorney

For more information, please attend one of our upcoming FREE webinars. If you have questions or concerns about including an incentive trust in your estate plan, contact an experienced Essex Junction trust attorney at Unsworth LaPlante, PLLC by calling 802-879-7133 to schedule your appointment today.

Stephen Unsworth
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