Trusts may be customized to suit the grantor’s wishes, which may include their determination of what’s best for their beneficiaries.
Incentive trusts impose requirements on beneficiaries that they must fulfill in order to receive distributions. These requirements are drafted with specific provisions in the trust document that trustees must ensure are met before releasing distributions to beneficiaries. The trusts preserve both assets and the grantor’s personal values.
Why Incentive Trusts
Individuals choose to use incentive trusts for many reasons—but the grantor’s intent in creating the trust remains the same: positively influence the life of the beneficiary. A grantor may be concerned about a beneficiary not finishing college, or a beneficiary who fails to maintain consistent employment. With an incentive trust the assets are available, the beneficiaries simply need to satisfy requirements like completing college or maintaining a certain GPA, or holding a job for a specified length of time or in a certain field before receiving distributions.
Without proper drafting by an attorney, an incentive trust may complicate trust administration. Our lawyers review a few obstacles below that may surface with some incentive trusts. If you are thinking about including incentive provisions in a trust, discuss these possibilities with your attorney:
Challenges of Incentive Trusts
Medical privacy laws. Although they are possible, incentive trusts that require beneficiaries to routinely pass drug tests may pose challenges with concern to medical privacy laws, such as HIPAA.
Void. Based on public policy, some courts may void provisions in some incentive trusts. Incentive trusts that require beneficiaries to maintain a certain weight, join a select political party, or impose marriage restrictions may likely result in time in court.
Tax burdens. The terms of some incentive trusts may make distributions mandatory for beneficiaries. However, these distributions may be more advantageously timed and delayed depending on the beneficiary’s income at the time. Adverse tax consequences may result if a delay is not possible. If the grantor truly desires to preserve assets, discuss trust provisions with a tax attorney so that beneficiaries enjoy a level of flexibility.
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