An incentive trust is a conditional legal arrangement that allows you to control how your assets are used by utilizing clauses or specific conditions that must be met. These clauses can limit your beneficiaries’ access to funds so that your assets are not misused. An incentive trust is typically used as a tool to meet certain goals of the grantor, like wishing for an inheritance to go toward the college education of their grandchild.
It is important to be specific and intentional when creating an incentive trust clause. Here are some considerations.
Clear language is key
Vague language or loopholes can cause confusion and misuse of the funds. For example, if the goal of the trust is to encourage a beneficiary to graduate from college, funds from an incentive trust could be used to pay for tuition, books, supplies, rent and related expenses. However, if your beneficiary has full access to their funds once they enter college, they may irresponsibly spend it. You could specify that funds are disbursed in installments, rather than all at once, to encourage responsible spending and ensure the money goes toward its intended purpose.
The trustee plays an important role
Another important aspect of incentive trusts is the role of the trustee and their importance in disbursing funds. In many cases, the trustee will have to make judgment calls when interpreting the language of the trust and deciding if the beneficiary has sufficiently met the terms. Choose someone you trust to correctly understand and interpret your intentions.
Incentive trusts can be helpful tools to encourage your children and grandchildren to spend wisely and achieve goals like graduating from college, choosing a career path or even just getting older before coming into a substantial inheritance. An estate planning attorney can assist if you have questions on whether an incentive trust is right for your situation.