Estate planning is a comprehensive exercise because you are not only dealing with a diverse array of assets; you are also dealing with a diverse array of family members who will be receiving inheritances. This is a very serious matter indeed because you may have family members who have often come to you in the past for financial assistance. There will come a time when you are no longer there, and if you have concerns about anyone being able to handle their inheritances wisely you may want to take proactive steps to protect them.
One of the ways this can be done is through the creation of incentive trusts. With these vehicles you appoint a trustee, and most people utilize a bank or trust company to serve this function, and of course you name your beneficiary. When you’re drawing up the trust agreement you include stipulations that must be met in order for your beneficiary to receive distributions from the trust.
Making sure that the inheritance lasts is not the only reason for creating the trust. Incentive trusts are generally used to guide people toward positive behavior or provide them with an incentive to stay away from self-destructive behavior. For example, you may have a loved one who has not yet completed college. Rather then leaving this individual a direct inheritance with no strings attached, you could create an incentive trust that provides distributions as long as the student remains in school. You could also include a lump sum “bonus” upon graduation and a dollar for dollar matching distribution for every dollar earned once this individual is out in the working world.
Another possible scenario would be to stipulate that someone with a substance-abuse problem complete a treatment program and submit to ongoing testing in order to receive distributions. You could stipulate anything you would like to as long as it is not illegal, and though such a trust is not necessary for everyone they can provide a solution under certain circumstances.
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- Leaving Assets Can Be Tricky – Part 3 - August 13, 2020