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How an incentive trust can influence your heirs

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Dear Savvy Senior: What can you tell me about creating an incentive trust? I have an adult son and daughter who are both financially inept. Before I die, I want to put some type of requirements in place that they will need to follow in order to receive their portion of my estate. — Frustrated Father

Dear Frustrated: If you want to influence your heirs even after you’re gone, an incentive trust is definitely an option to consider, but be careful how you construct it because it can cause unintended, unfair consequences. Here’s how it works.

Incentive trusts basics

An incentive trust is an ­estate-planning tool designed to help encourage your heirs in a direction you desire when you’re no longer around.

With an incentive trust, some or all of your assets are passed to your trust when you die rather than directly to your heirs. Your trustee is empowered to distribute funds from the trust only if and when your beneficiaries do whatever it is you have specified in the trust.

For example, an incentive trust might encourage a beneficiary to graduate from college, enter a particular profession, get married or even have children. They could also reward beneficiaries who do charitable work or supplement the incomes of those who choose low-paying, yet meaningful careers, such as teaching or social work. Or they could penalize beneficiaries who don’t work by cutting off or decreasing distributions, or placing restrictions on heirs with addictions by requiring that payments go directly to rehab centers.

But be aware that these types of trusts can also have drawbacks. A poorly constructed incentive trust can have a high risk of unintended consequences. For example, if your trust provides a financial incentive for your children to be employed full time, but one of them gets sick or seriously injured in a car accident and can’t work, they would be punished unfairly.

You also need to know that incentive trusts aren’t cheap. You can expect to pay an attorney $2,500 to $5,000 to draft one.

There are also legal limits on what you can do with an incentive trust. While state laws vary, incentive trusts that encourage a beneficiary to join or leave a particular religion, or leave a spouse or not marry at all, can be challenged in court and possibly struck down.

Tips to create one

To create a solid incentive trust that accomplishes what you envision, you need to hire an estate-planning attorney. You’ll also want to include language granting your trustee the right to use his or her discretion and that the trustee’s decisions should be final and binding.

This allows your trustee to make common-sense rulings, which will reduce or eliminate the chances of unintended and unfair consequences. It also makes it very difficult for beneficiaries to successfully challenge the trust or trustee in court.

To find an experienced attorney in your area to help you create an incentive trust, check out the National Academy of Elder Law Attorneys (naela.org) and the American College of Trust and Estate Counsel (actec.org).


Jim Miller is a contributor to NBC-TV’s “Today” program and author of “The Savvy Senior.” Send your questions to Savvy Senior, P.O. Box 5443, Norman, OK 73070; or visit savvysenior.org.


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