Establishing an Incentive Trust

When an elderly parent or grandparent plans their estate, they may be apprehensive about leaving substantial sums of money to teenagers or young adults, who may misspend or waste the funds. Some parents and grandparents attempt to avoid this by setting up a trust that distributes funds at certain ages. For instance, a grandchild could receive one-third of the estate at age 25, another one-third at age 30, and the remainder at age 35. However, there is another option, known as an incentive trust. These types of trusts come with specific instructions from the trustor about when and how the trust’s funds can be used. To learn more about establishing a trust for your heirs, please contact an experienced estate planning attorney who can address your concerns.

The Purpose of an Incentive Trust

Incentive trusts allow trustors to create specific instructions with which trustees must comply. In most cases, these directions are included in an effort to ensure that trust funds are used in such a way that encourages positive behavior or discourages waste or unproductive activities. Generally, these types of trusts are created to:

• Encourage healthy living;
• Reserve funds until a person has reached an age of maturity;
• Promote a family business; or
• Motivate a work ethic.

For instance, a trustor may include a provision stating that a trust’s funds can only be used to pay for the cost of certain activities, such as receiving a college education. Alternatively, a trustor could include instructions stating that funds will be distributed once certain educational milestones have been reached. Still others can withhold distributions when a trustee is engaging in questionable or dangerous activities, such as drug use or excessive spending.

Creating an Incentive Trust

Incentive trusts can also be structured in such a way that:

• The beneficiary only receives amounts that match what they earn on a dollar-for-dollar basis;
• Descendants are required to distribute a certain amount of the trust’s funds every year to a charitable foundation or fund chosen by the trustor;
• Subsidizes working for a non-profit, working as a teacher, or organizing for a political cause;
• Heirs can only receive funds when they get married or have a child;
• Descendants are rewarded for being drug or alcohol free for a specific period of time; or
• The heir is able to receive an amount matching the down payment on a house.

Failing to ensure that an incentive trust is carefully constructed can lead to challenges down the road based on violations of an heir’s constitutional rights. For instance, Illinois courts have ruled that clauses disinheriting a descendant for marrying someone outside of the family’s faith are invalid because it places a substantial and unfair limitation on a person’s right to marry.

Call Today to Schedule a Meeting With an Experienced Estate Planning Attorney

Although incentive trusts are a good option for many families, they must be carefully crafted so as to serve the best interests of the parties, while not infringing on their rights. If you have questions about establishing a trust for your loved ones, please contact one of the experienced Highland Park estate planning attorneys at Orlowsky & Wilson, Ltd. Attorneys at Law by calling 847-325-5559 today.