It is important to understand the fact that there are many different estate planning approaches that can be taken. You never have to settle for an asset transfer method that you do not feel entirely comfortable with, because you can rest assured that other options exist.
With this in mind, let’s look at the value of incentive trusts.
The best way to explain the way an incentive trust can be used is through the presentation of a simple example.
Let’s say that you are going to be leaving an inheritance to your granddaughter. Looking at the timelines, you determine that she could be at or near college age when you pass away.
You are in a position to provide her with a life-changing inheritance, but you want her to realize her full potential. And of course, most young people are really not ready to freely handle large sums of money.
Under these circumstances, you could establish an incentive trust and make your granddaughter the beneficiary. You would name a trustee to act as the administrator, and with this type of trust, you may want to use a professional like a trust company or the trust department of a bank.
The trust would be irrevocable, and the terms that you set forth would be etched in stone. In other words, your granddaughter would not have the ability to directly handle the funds or change the terms.
In the trust declaration, you could instruct the trustee to pay college tuition and make generous living expense distributions as long as your granddaughter stays in college. You could provide a bonus upon graduation and further incentives to attend grad school.
To instill a work ethic, you could allow for a dollar for dollar match of earnings that are brought in by your granddaughter after she embarks on a career path.
As she gets older, she will mature. A logical progression would be to allow for large chunks of the principal to be distributed when the beneficiary reaches certain age plateaus.
An incentive trust can also be used to guide people away from negative behavior. To provide another example, a person with a substance abuse problem could be incentivized to seek counseling and stay clean on an ongoing basis.
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