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Your Guide To Incentive Trusts

It’s no secret that everyone needs estate planning documents. After all, you never know when tragedy may strike and you always want to ensure that your assets are distributed according to your wishes, not anyone else’s. However, many wrongly assume that with only a will they have a complete set of estate planning documents. Wills are susceptible to contestation which can force beneficiaries to wait a long time to receive what you want them to. They also allow your assets to get eaten up by taxes and paying off debts. Worse yet, should the case of a contested will come to pass your beneficiaries may end up not getting what you think they should. That’s why no estate planning document list is complete without trusts.

One of the top questions when it comes to estate planning, next to “what’s the difference between a will and a living will?” is “what’s a trust?” and luckily this is just as easily answered as the difference between a will and a living will. Trusts enable you to make sure your assets get automatically distributed how and when you want them to. However, they’re a staple of estate planning because they also do much more than that. Holding assets in trusts helps to avoid all stages of probate. Assets held in trusts are resilient against being used to pay off debts and taxes. A specific type of trust, the incentive trust, can even help you make sure that those people you love act admirably.

Incentive trusts have become the hottest and most talked about trust for a reason. They offer you the miraculous ability to make sure beneficiaries make responsible decisions in life. They do this through only distributing stored funds when set conditions are met. For instance, if you want to make sure your nephew goes to college, an incentive trust allows you to ensure he only gets his share of inheritance if he does so. Alternatively, another popular use of incentive trusts is to combat substance abuse by only paying out to beneficiaries so long as they stay clean. For instance, your daughter could receive the trust’s entirety once she hasn’t touched a cigarette for a year or could get a small portion every day that she doesn’t smoke. As these examples show, incentive trusts are powerful tools that can ease the burden of wondering how your family will act when you’re gone. The requirements for distribution of funds can be anything you can imagine, so long as it’s legally permissible, so incentive trusts allow you to provide powerful incentives for heirs to make the changes and decisions that you want them to.

However, as with any estate planning tool, incentive trusts aren’t perfect for every situation. In fact, there are some circumstances where the use of incentive trusts can prove disastrous. Indeed, just as it’s important to understand the subtleties of any estate planning document you pursue, it’s important to know the facts about incentive trusts. It’s also important not to be scared away by their complexity and shun incentive trusts completely because they offer extraordinary and truly unique benefits that no other estate planning document can provide. We want to help you understand incentive trusts, why they’re so popular and when they’re a good idea to pursue. That’s why we would like to invite you to keep reading for an in-depth analysis of all aspects of incentive trusts.

Why are Incentive Trusts So Popular?

There’s no getting around the fact that incentive trusts are one of the hottest estate planning tools. They have become a favorite of people with all levels of wealth who seek to leave their children with more than just money. However, in order to have a holistic understanding of incentive trusts it’s important to know why they’ve been enjoying a recent surge in popularity. It’s also important to recognize the nature of the danger brought about by this mass interest.

Traditionally, trusts with simpler preset requirements for paying out were more popular. For instance, trusts that pay out when beneficiaries reach a certain age or trusts designed to pay for certain standards of health, education, maintenance and support are extremely common options. However, for many, the extreme customizability of incentive trusts has proven to be irresistible. After all, why limit yourself to standardized conditions when you can create a custom set designed specifically for your own purposes? This desire for freedom coupled with a lack of trust in younger generations has led incentive trusts to their meteoric rise. However, as it turns out, there’s a very good reason that these more standardized documents can provide far more stability.

As will be discussed further, incentive trusts require both an exceptionally skilled attorney and a knowledgeable, committed trustee. Furthermore, when used in the wrong situations they can cause lasting devastation and severely impact the quality of life of beneficiaries. All of this means that while more standardized trusts can be often be used rashly without severe consequences, incentive trusts require extreme caution. Unfortunately, many people fall for the trap of prescribing incentive trusts unnecessarily and trusting subpar attorneys to handle the nuance of an incentive trust. If you want to avoid this costly mistake then it’s imperative that you not only select a masterful attorney but also understand for yourself the basics of incentive trusts prior to fully considering them.

Setting Up an Incentive Trust

The first thing that you should do when creating an incentive trust is draft a guiding philosophy or motivation for your decisions. Not only will such a paper help you decide how to move forward with setting up the incentive trust, it will also provide important guidance for your trustee. It may even be used to help the beneficiary understand why you chose to implement an incentive trust. Once you’ve created this guiding philosophy you should present it to your attorney and inform them as to which beneficiaries and conditions of disbursement you want to implement. A dedicated attorney will be able to transfer this information into a trust that is representative of your wishes and not only takes into consideration alternate beneficiary actions but also provides flexibility for unforeseen situations.

Ensuring that the trust is flexible is vital. After all, you cannot account for all possible situations and a well-crafted incentive trust will not force beneficiaries away from positive life decisions simply because they weren’t previously considered. However, this flexibility is worthless if your trustee is not competent or doesn’t understand the motive behind your decision-making. It is important when setting up the incentive trust that you find a trustee who is not only capable of careful decision-making, but who also either knows, or is willing to get to know, you well enough to determine how you would want funds disbursed. Of course, this also underlines the importance of creating a clear and complete statement of your reasoning behind the incentive trust. Finally, it’s important to inform beneficiaries of the trust while you are still alive so that they know to expect it.

Not adhering to these suggestions can have catastrophic consequences. If beneficiaries expect quick and easy money, they will feel wronged and punished when they don’t get it. This resentment will certainly stunt any of the growth the trust tries to foster. Also, without proper documentation of your reasoning, trustees may feel too uncertain to deviate from the explicit terms of the trust. This can produce a frustrating prison of a document for the beneficiary instead of a way to genuinely reward them. Having an incompetent trustee can result in assets not being distributed even when they should be. Issues can also arise if your attorney does not create an incentive trust with enough room for trustee interpretation. If this is the case then their hands may be tied even when they think you would want some certain action taken. All of this shows the complexity of incentive trusts and the tremendous diligence that must be maintained when creating one. However, the benefits of incentive trusts are so strong that they have continued to thrive.

Benefits of an Incentive Trust

The most immediately apparent benefit of using an incentive trust is that you can help guide the actions of those you care about. After all, what better incentive is there to make changes than money? Unlike most estate planning tools, incentive trusts give you the ability to truly manage behaviors of your heirs. That means peace of mind knowing that even should something happen to you, your heirs will not fall out of line. After all, some of your heirs may not be ready to succeed without your guidance. For these individuals an incentive trust can truly shine by enabling your guiding influence in their lives to remain. An incentive trust can be used to exert your influence in almost any way imaginable, meaning that there are abundant ways you can apply one, but it’s also important to be selective when deciding whether or not to create an incentive trust.

Incentive trusts lend themselves to certain specific circumstances where they can have immense benefits over alternative estate planning measures. One particularly notable application of an incentive trust is as an alternative to a minor’s trust. Many who have underage heirs rely on a trust that pays out to those heirs when they reach a certain age. Of course one of the flaws of such a trust is that the beneficiaries need only grow older, not necessarily more financially responsible, in order to get their share of inheritance. By using an incentive trust with requirements revolving around financial responsibility, you can ensure that those heirs who have reached adulthood also act like adults by the time they get their money.

Incentive trusts can be incredibly powerful tools for positive motivation. When requirements encourage certain positive behaviors such as working or earning a college degree, they tend to be seen by beneficiaries as an uplifting force. After all, these decisions have benefits of their own which are likely to be understood by the beneficiaries. This way the incentive trust can serve as a gentle reminder that you care and always want what’s best for them. No one wants their heirs to resent them. So, when used to promote good behavior incentive trusts really shine in their spectacular ability to build warm feelings between the beneficiary and the grantor.

Incentive trusts also have another very common use where they help to overcome a similarly common problem. Many wealthy people fear that their heirs may become spoiled by the sudden boon of inheritance. After all, the image of a youth ruined by a fortune that he hasn’t really earned has become one of the most prevalent stereotypes in our society. Incentive trusts can be used to provide an alternative to a sudden inheritance and can offer a method to force heirs to earn their money without denying them their rightful assets. Incentive trusts are frequently set up to match an heir’s income. The more money that they earn for themselves, the more of your assets they have access to. In this case your heirs can reap the benefits of your hard work without learning to rely entirely upon it. Of course, your heirs may decide to enter a lower income, more charitable profession such as clergy or teaching. However, a flexible trust with a knowledgeable trustee should be able to accommodate such a decision.

An incentive trust also brings all the estate planning benefits of any other trust. The fact that assets held in trusts avoid probate brings a sea of benefits. For one thing, they save money for beneficiaries by avoiding costly estate tax. This means more of your assets go where you want them to and fewer get stolen away. Along the same lines, they are also difficult for creditors to get their hands on. All types of trusts also help you avoid the notorious slowness associated with probate which means that your loved ones can get their money far faster. These benefits absolutely make a difference and show why trusts, including incentive trusts, have been chosen to complement wills more and more frequently. Even though an incentive trust has more specific, and perhaps more noteworthy, benefits these more general boons should certainly not be ignored when deciding if an incentive trust is an appropriate measure.

Incentive trusts are not static tools. The inherent variability in how they are set up means that they can be adapted to a wide variety of circumstances. In many of these circumstances the benefits of incentive trusts can be enormous. Whether they are enabling heirs to avoid becoming spoiled or promoting a solid education, incentive trusts are undeniably powerful tools. However, that isn’t to suggest that incentive trusts are always a viable option. In fact, incentive trusts can be just as damaging as they can be helpful, and there are pronounced drawbacks when they are used without discretion.

Drawbacks of an Incentive Trust

One may infer that incentive trusts are flexible tools that can be used to accomplish a variety of objectives. However, some of the most popular and tantalizing objectives can be extremely damaging. Incentive trusts are often used to forbid negative behavior such as smoking or drinking. This practice tends to only breed resentment and only bring reform until the trust is emptied. Such conditions are often seen as unwarranted burdens instead of as meaningful positive changes. Of course you want to protect your loved ones, but it’s important to find constructive ways to do so without damaging their opinion of you. If that can’t be done with an incentive trust then it may be warranted to look at alternative methods.

Incentive trusts can also bring forth anger and resentment through their controversial nature. Some argue that it is immoral to attempt to guide heirs from beyond the grave and, in particular, that forcing adult heirs to comply with one’s wishes is wrong. Those who argue this way may be missing the point of incentive trusts as a tool to reward instead of to punish or to control, but that’s irrelevant. What’s relevant is that utilizing incentive trusts in your estate planning may be a decision some find shocking and unacceptable. If you are prepared to rely on this type of trust then it is important to accept that a judgmental few may take fault with your actions and to be ready to do what is best for your heirs regardless of their opinions.

With any estate planning document the necessity of trusting only a competent and experienced attorney can’t be overstated. However, this is even more true for incentive trusts. The process for creating incentive trusts is particularly complicated. An ineffective attorney may create a trust that can be forcibly disbursed in court. Worse yet, if your trustees don’t have an accurate understanding of your conditions and motivations they may disburse funds early themselves. Of course, if you trust an established and communicative estate planning attorney then this disadvantage can be completely mitigated.

Incentive trusts can also be problematic should the beneficiary face a dire financial situation or other emergency. After all, if they can’t access their inheritance then they can’t use it to wipe away debts, pay medical expenses or fix any other urgent matters. Even without any pressing need for cash, incentive trusts that aren’t carefully crafted can prevent beneficiaries from making positive choices not included as requirements for disbursement. For instance, if an heir was planning to buy their first home with inheritance money they will find themselves unable when their share of assets are locked away in an incentive trust. In order to provide those you care about with the freedom and opportunity to better their lives as they see fit, incentive trusts should generally be used only for heirs who truly require guidance.


No estate planning is complete without trusts, and few trusts offer the power and customizability of incentive trusts. They can enable you to still leave assets for those who otherwise may not be responsible enough to handle them. Of course, the opportunity to make sure those assets are used well and create a dynamic rate of disbursement of funds is invaluable. However, these tools can be stifling and when used incorrectly breed only resentment as opposed to responsibility. In light of this, these valuable tools should be used carefully as part of a well thought out set of estate planning documents, not thrown around recklessly.

Incentive trusts have earned a reputation as tools that excel in a number of particular situations. They are frequently used to promote what are seen as positive life decisions such as attending college and having children. In this case they often build a feeling that the departed hasn’t completely left and can imbue loved ones with a lasting sense of comfort. Of course, helping heirs make the choices necessary to live the best lives they can is a strong enough benefit in and of itself. That’s why no one should brush incentive trusts aside, and anyone looking into estate planning services owes it to themselves and those they care about to look seriously into whether an incentive trust is merited.

On your own, it can be hard to distinguish exactly what circumstances merit an incentive trust. As has been repeatedly stated, incentive trusts also require an eye for detail during their creation. That’s why you need to make sure the attorney you turn to has the attentiveness, passion and careful diligence required to use incentive trusts properly. At Morgan Legal Group we offer exactly that. It’s well known that if you’re looking for an estate attorney NYC is the place to look, and we are known as the best in the city. We provide careful, complete estate planning and work to create resilient documents that capture exactly what our clients want and need. We’re also confident that you’ll find our entire team patient and extremely communicative which is just what you’re looking for if you have questions for an attorney. Stop by one of our law offices in New York City for a consultation, ask an attorney a question for free and we can get started on figuring out if incentive trusts are a good option for you.

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