Monday, July 27, 2015
A primary concern for those setting up trust with a third party beneficiary is how the money will be used once it is distributed. As a result, incentive trust have become popular as they dictate how the assets will be distributed and often creates a reward for behavior that is in line with the settlor's expectations. Here are some tips and considerations to keep in mind when a client is considering the use of an incentive trust:
- Make a plan for the distributions such as granting a trustee total discretion or creating a list of actions that, if complied with by the beneficiary, will net an additional (or any in some circumstances) distribution. The settlor will also need to determine if distributions will come from income, principle, or both.
- If the trust is set up to support a particular goal, such as attending college, then the settlor must decide if the distributions will be made directly to the beneficiary or if the trustee will pay any bills that accrue directly. This is particularly important if the beneficiary has shown signs of irresponsible use of money in the past or there are concerns that a distribution will not be used appropriately.
- The client will need to determine if the trust will continue for the life of the beneficiary or will terminate with its assets distributed at a predetermined time. Most importantly, the settlor, preferably in consultation with advisors, must determine what the future needs of the beneficiary will be and if a trust will remain useful in the distant future when circumstances change.
- Determine any penalty that will be applied if the beneficiary does not comply with the terms of the trust. For example, if the purpose of the trust is to fund an advanced degree, which the beneficiary never completes, then the trust corpus will pass to a charity.
- Always make sure that the final draft of the instrument contains all key terms and conditions. One forgotten sentence may lead to years of legal wrangling down the line and defeat the purpose of the trust.
See Charles A. Redd, Tips From The Pros: The Ultimate in Dead Hand Control–Incentive Trusts Part II, Wealth Management, June 25, 2015.