When you are planning your estate, part of the process involves positioning your assets optimally for protection and tax efficiency. This is the hard financial side of the endeavor, but there is a human side as well. You may be in a position to bequeath large sums of money to the people that you love the most, and on the surface this can seem like the easiest thing in the world. Nobody wants to pass away, but when your time has come it is nice to know that you are in a position to provide a comfortable life for your family.
But on the other hand, you may have some concerns when it comes to one or more of your heirs. There may be someone who is still young and not even out of college. Will this loved one finish school and make his or her individual mark on the world if there is no financial motivation to pursue a career?
A lot of people don’t like to talk about these types of things, but we are all aware of the fact that substance abuse exists. If you had a loved one who was battling such a personal challenge, would it be wise to bequeath this person a large amount of money with no strings attached?
These are the types of scenarios that can be addressed by the creation of an incentive trust. With these vehicles you name your beneficiary and you appoint a trustee, but you also add stipulations that must be met in order for the beneficiary to receive distributions from the trust.
To respond to the two situations above you may in the former case stipulate that distributions will be made as long as the beneficiary stays in school, and allow for a distribution to match each dollar earned after graduation. In the latter instance you may require completion of a treatment program and subsequent testing as conditions that must be met before distributions will be made.
Incentive trusts are clearly not not going to be necessary most of the time, but it is good to know that they are available to you should a situation exist that calls for such a vehicle.
Paul A. Kraft, Estate Planning Attorney
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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