If you are planning to leave behind a sizeable estate, you may (understandably) want to retain a certain amount of control over how that inheritance is used by your beneficiaries. You may also wish to encourage and reward positive behavior by those same beneficiaries. Fortunately, an incentive trust is an estate planning tool that can help achieve both goals. To help you better understand, the Indianapolis attorneys at Frank & Kraft explain how an incentive trust might fit into your Indiana estate plan.
What Is an Incentive Trust?
An incentive trust is a type of trust that distributes assets to beneficiaries based on the fulfillment of certain conditions or milestones set by the Grantor (the person creating the trust). The Grantor decides what behaviors, achievements, or actions the beneficiary must meet to receive distributions from the trust. For example, the Grantor may require a beneficiary to graduate from college, maintain a steady job, or demonstrate financial responsibility before the beneficiary is entitled to disbursements from the trust. The key advantage of an incentive trust is that it allows the Grantor to guide the actions beneficiaries even after the Grantor has passed away.
Common “Incentives” in an Incentive Trust
As the Grantor of an incentive trust, you can use the trust terms to incentivize anything that is important to you as long as it is not illegal, impossible, or unconscionable (such as illegal conduct). Some common “incentives” found in an incentive trust include:
- Education and Personal Development: One of the most common uses of an incentive trust is to encourage educational achievement. As the Grantor, you can require beneficiaries to complete certain levels of education, such as obtaining a college degree or pursuing advanced certifications, to receive distributions from the trust. For example, you might set up a trust where a beneficiary receives a portion of the assets upon completing a bachelor’s degree and additional distributions upon earning a graduate degree or professional certification.
- Promoting Financial Responsibility: You can set conditions that require beneficiaries to demonstrate responsible money management before they can access trust funds, such as requiring them to maintain employment, save a certain percentage of their income, or avoid excessive debt. By linking distributions to responsible financial behavior, you can help prevent beneficiaries from squandering their inheritance. You might even structure the trust to provide annual distributions that increase if the beneficiary contributes to a retirement account or maintains a good credit score.
- Supporting Charitable Giving: You may want to incentivize beneficiaries to engage in charitable activities by making trust distributions contingent upon their involvement in volunteer work or contributions to charitable organizations. You might, for example, stipulate that a portion of the trust’s funds will be released to a beneficiary each year if they donate a certain amount of their own income to charity or volunteer a specific number of hours at a nonprofit organization.
- Preserving Family Values and Traditions: An incentive trust can be used to reinforce family values and traditions by making distributions contingent upon family involvement or participation in certain activities, such as encouraging beneficiaries to attend family gatherings, maintain family-owned businesses, or preserve family heirlooms. An incentive trust can also provide guidance and structure for beneficiaries during challenging life events, such as divorce or substance abuse. The trust may include provisions that withhold distributions during times of financial instability or personal crises to prevent the funds from being misused.
Can We Help You Create an Incentive Trust for Your Indiana Estate Plan?
For more information, please join us for an upcoming FREE seminar. If you are interested in creating an incentive trust for your Indiana estate plan, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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