When you make gifts in your estate plan, you often have some idea how you hope those gifts are used by the recipients. In fact, it may be very important to you that assets are used in a specific way or for a specific purpose. One way to help make that happen is to gift the assets using an incentive trust. The Indianapolis trust attorneys at Frank & Kraft explain how an incentive trust can help ensure that assets you gift are used as intended.
Trust Basics
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.
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.
How Does an Incentive Trust Work?
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 is not 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.
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 Indianapolis Trust Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to use an incentive trust to help ensure that gifted assets are used as intended, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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