A trust is a binding relationship in which the trustee holds and manages the assets that the grantor places within the trust. In an incentive trust agreement, the trustee must distribute assets to the beneficiaries only when they meet certain conditions that the grantor sets when they establish the trust.
How an Incentive Trust Works
An incentive trust is a type of trust that details specific conditions that a beneficiary must meet in order to receive a portion or all of their inheritance. For example, someone may wish to leave some of their assets to their grandchildren. However, especially in the cases of large estates, the grantor may not want the inheritance to diminish the grandchild’s drive and pursuit to obtain a meaningful career or educational status. Thus, leaving assets in an incentive trust allows the grantor to create specifications that the grandchild must meet before they receive their inheritance. These specifications may be that the grandchild must obtain an undergraduate degree, meet certain high school or college grade requirements, or make a certain amount of money per year.
Furthermore, the trust may be set up to give a portion of the estate to the grandchild at landmark moments. For example, a grandchild may get a third of their estate when they graduate high school, a third when they obtain an undergraduate degree, and the final third when they obtain a graduate degree or achieve a career milestone.
Why Use an Incentive Trust
Because of their goal-oriented nature, incentive trusts are extremely popular among upper-middle class and wealthy families. Many of these families want to pass on their real estate, business holdings, or financial assets to their children and grandchildren to give them a better life. However, because of the typically large asset value that these families look to pass on, they become worried that their descendants will suffer from “affluenza.” This term refers to the psychological condition in which rich children feel entitled to the luxuries of life and thus, do not work towards them. Thus, the idea of an incentive trust is that it allows parents or grandparents to leave their wealth to close family members while still pushing them to find a fulfilling and successful career, become self-sustaining, and also lowering the chance that the estate will be wasted by frivolous spending habits.
Who Can Be a Trustee
A trustee holds, manages, and eventually distributes assets for the benefit of a third party. The trustee oversees and manages the assets within a trust. Thus, to be able to serve as a trustee in the United States, a person must be at least eighteen years old and not be experiencing any forms of incapacity.
Because an incentive trust is most commonly used for grandchildren that will require the trust to stay around for longer than normal, one should name both a trustee and a secondary trustee. The reason for this is that the trust could be around for 25 – 30 or even longer. Thus, it is common to name a professional such as a lawyer, financial consultant, or corporation as the secondary trustee. Many incentive trusts choose a professional trustee as a backup plan. This ensures that no matter how long it takes the beneficiary of the trust to receive their benefits, they will always have someone who can distribute the benefits for them.
One other important note is that a trustee to this type of trust has many more responsibilities than most trustees. An incentive trust requires a beneficiary to meet goals before receiving their inheritance. Thus, the trustee must be monitoring their progress so that when the beneficiary does meet the goal, they can receive their portion of the estate. Additionally, a trustee will have to make crucial judgments about giving a beneficiary some of their inheritance. This is especially true even if they did not meet the stated goals. To properly administer the trust, the trustee must obtain and analyze income tax returns, medical reports, economic circumstances, and more.
Issues with an Incentive Trust
An incentive trust allows the grantor to ensure that their children or grandchildren will meet certain educational and financial goals. However, incentive trusts have also been criticized because their conditions are relatively inflexible. For example, a wealthy parent’s child may not be able to fulfill certain criteria through no fault of their own. For example, they may not address issues that occur if the beneficiary becomes disabled. Furthermore, it may be problematic for a stay-at-home mother to reach the goals necessary to receive the funds. Both of these reasons and the issues listed below could lead to a beneficiary not being able to receive their inheritance even though they are living and meaningful and productive life.
- If the child is in school
- The child is performing volunteer services
- If a child is a caregiver for an elderly parent
- What if there is an economic recession and the number of jobs available is severely reduced
It is impossible to predict what the future will bring and what special circumstances may involve a trust beneficiary. These types of trust are very difficult to draft, but even more difficult to administer. The Trustee has a much more difficult task than usual. To monitor objective criteria, the Trustee must obtain and analyze income tax returns, medical reports, economic circumstances, and much more. To best achieve this goal, the Trustee will need broad power to investigate the beneficiary’s circumstances.
There are many factors to consider when setting up an incentive trust. Furthermore, in many cases, an incentive trust can achieve its purported goal. However, because of there ridged manner, it is important that you appoint a trustee that can make judgment decisions. This is important as a beneficiary can still live a fulling life without meeting the criteria.
Trust and estate laws are complex. This is so no matter the type of trust you decide to establish. As such, it is extremely important to have legal representation that can help you correctly set up your trust. The Antonoplos & Associates trust and estate lawyers have over 20 years of experience helping clients set up incentive trusts. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust.
Contact our DC Law Office for More Information
Finally, for more information regarding incentive trusts, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.