Although the primary goal of your estate plan may be to create a roadmap to be used to distribute your estate assets according to your wishes after you are gone, your estate plan can achieve so much more. For example, you may want to pass down more than just monetarily valuable assets to your loved ones. You may hope to also pass down life lessons and wisdom you have gained over the course of your lifetime. You may also hope to continue to guide your children and grandchildren after you are gone. If so, the Los Angeles attorneys at Schomer Estate & Wealth Advisors explain how an incentive trust may help you to achieve these estate planning goals.
Trust Basics
A trust is a fiduciary arrangement that allows a third party, referred to as a Trustee, to hold and manage assets for the benefit of a beneficiary or beneficiaries. The creator of a trust is referred to as the “Settlor,” the “Trustor,” or the “Grantor.” Trusts can be arranged in many ways and can specify exactly how and when assets held by the trust are to be distributed to the beneficiaries. All trusts can be broadly divided into two categories – testamentary or living trusts. A testamentary trust is created through a provision in the Settlor’s Last Will and Testament and, therefore, does not activate until the death 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. An incentive trust is so named because the trust terms are used as an “incentive” for the beneficiaries and may be either a testamentary trust or a living trust.
How Does an Incentive Trust Work?
An “incentive trust” is simply a trust that uses the terms of the trust to encourage a beneficiary to engage in, or refrain from engaging in, specific behaviors. The “incentive” is the distribution of trust assets. The terms may provide for additional disbursements if the beneficiary complies with the terms or may withhold a distribution if the beneficiary fails to comply with the trust terms – or both “incentives” may be included within the trust terms.
How Does an Incentive Trust Fit into My Estate Plan?
In a perfect world, our children, grandchildren, and other beneficiaries would do everything correctly and make all the right decisions without the need for an incentive. In the real world, however, most of us have at least one child or grandchild who just must learn lessons the hard way. For that beneficiary, a little “encouragement” may be necessary. Ultimately, you are passing down your hard-earned assets to the beneficiary and there is nothing wrong with requiring the recipient to do, or not do, something to earn those assets. As the Settlor of your incentive trust, you can create any incentive you wish, as long as the terms are not illegal or impossible. Some common uses for an incentive trust, however, include:
- To require an addict to seek help. Distribution of trust assets might be dependent on a beneficiary seeking help for an addiction and/or prove that he/she is no longer using drugs or alcohol.
- To encourage a beneficiary to further his/her education. If higher education is important to you, a trust terms might allow for additional distributions if a beneficiary attends college and gets good grades.
- To foster faith. If religion is important to you, you might allow for extra distributions from the trust if a beneficiary exhibits involvement within your chosen faith.
- To encourage charity. Your incentive trust could provide funding for a beneficiary to work with a charitable organization.
- To support family values. You might include a trust term that provides funding to a beneficiary who wants to remain home after the birth of a child.
Would You Like to Learn More about an Incentive Trust?
For more information, please join us for an upcoming FREE seminar. If you want to learn more about how an incentive trust might fit into your estate plan, contact the experienced Los Angeles trust attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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