4 uses of an incentive trust

On Behalf of | Jul 3, 2024 | Estate Planning

A trust is a common legal document added to an estate plan to protect assets, and it is overseen by a fiduciary known as a trustee. The trustee is responsible for managing the trust’s assets and distributing funds to the trust’s beneficiaries. There are several kinds of trusts, each with its own unique advantage. One is an incentive trust.

An incentive trust allows the grantor to include conditions that the beneficiary must meet if they wish to access the trust’s funds. 

1. Encourage a beneficiary to go to college

A trustee may want a beneficiary to pursue higher education. The beneficiary could access trust funds for as long as they are enrolled in college to afford books, tuition, food and rent. The trust could also give the beneficiary funds proportional to their grades.

2. Help a beneficiary maintain their sobriety 

If a beneficiary abuses alcohol or drugs, then the incentive trust could be used to support them in getting help. The trust could pay for the beneficiary’s rehab and provide for their needs only if they continue to stay sober.

3. Encourage a beneficiary to avoid harmful behaviors

Incentive trusts are sometimes used to discourage behavior that the grantor feels is detrimental to the beneficiary, society or both. For example, the trust could be structured so that the beneficiary only receives the funds if they reach a certain age without ever using drugs or getting arrested.

4. Incentivize a beneficiary to be independent

Some grantors don’t want a beneficiary to end up indolent, relying on their trust fund and doing nothing with their life. The trust may pay matching amounts to the income the beneficiary earns on their own or only pay distributions so long as the beneficiary is employed.

Having a well-defined incentive trust is important to avoid loopholes. Legal guidance is available during the estate planning process.