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Incentive Trusts: If You Do This…



When inspiring those we care about to achieve life goals is an important consideration during estate planning, establishing an incentive trust might be the way to go. Read on for an overview of incentive trusts, as well as some helpful basics about trusts from estate planning experts.


Trust Basics Explained

Given the tremendous flexibility trusts offer families in planning for the future, they are increasingly popular estate planning tools. While there are different kinds of trusts, the legal underpinnings are similar. Simply put, a trust, according to Collins Law Group,is a relationship whereby property is held by one party for the benefit of another”:


A trust is created by a Settlor, also called a Maker, Grantor, or Trustor who transfers property to a Trustee chosen by the Settlor. The Trustee holds that property for the trust beneficiaries. The beneficiary of a trust can be an individual, an entity (such as a charity or political organization), or even the family pet. A trust must have at least one beneficiary but may have an unlimited number of beneficiaries.


It is important to be clear on the basic differences in trust types, so as to carefully choose an arrangement that best aligns to specific estate planning goals. For example, an irrevocable trust is essential if the goal is qualifying for public care support, such as Medicaid. More detailed information about trust law is available here. Estate planning experts offer this helpful overview of the fundamentals:


All trusts can be broadly divided into two categories — testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime 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. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason unless a court grants the right to revoke or modify the trust.


Gifting With Conditions

Sometimes, in accordance with values and hopes, though we earmark assets for others, we may want to put conditions in place for when those assets can be received. For example, we may want a certain level of education to be achieved or career goal to be attained before assets are given. Perhaps our conditions relate to getting healthy or overcoming an addiction. These are all examples of when an incentive trust might be useful, as Collins Law Group further explains:


The term “incentive trust” is an informal name given to a trust that encourages good behavior by the beneficiaries of the trust. Usually, an incentive trust is a revocable living trust; however, you could also use a testamentary trust or even an irrevocable living trust. A revocable living trust is usually chosen though because it offers you the ability to modify the terms of the trust while you are still alive. The terms of the trust are what make it an incentive trust because those terms are used to guide the behavior of the beneficiaries. A beneficiary will only receive disbursements if he/she does something, or refrains from doing something, that the Settlor deems important. For example, a beneficiary might only be entitled to receive disbursements from the trust if he/she maintains a specific grade point average in school….As the Settlor, you can include any terms you wish if they are not illegal, unconscionable, or impossible to fulfill.


In addition to incentivizing educational and career achievements and healthy living behaviors, trust agreements may also focus on family goals, like home ownership. Philanthropic goals are another example of how incentive trusts can align assets to put values into action, rewarding “a beneficiary for engaging in charitable activities by matching contributions or allowing distributions to supplement the income of a beneficiary who chooses to work for a non-profit or volunteer for free at a charity.”


Establishing A Trust

When opting for a trust, be sure to put enough detail into the agreement to make the purpose and conditions of it clear. It’s also vital to choose a reliable trustee. As lawyers remind us:“With a proper trust, there will not be court involvement which means this person will have no court oversight in how they do their duties as trustee—choose wisely!” In doing so, it’s best to begin by carefully considering the qualities, skills and time commitments a trustee will need to successfully administer the terms of the trust. Learn more about the essential duties of trustees right here.


Ultimately, whether a professional, friend, or relation is selected, the trustee has a fiduciary obligation to the beneficiaries—and must always exercise reasonable care and skill in managing the assets of the trust. Accordingly, the trust agreement may require a trustee bond, which is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable state law. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere—even the law office.


Obtain a Trustee Bond Here.


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