Incentive Provisions in a Living Trust

By adding certain provisions in your living trust, you can encourage positive behavior from your heirs.

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The Hayes Law Firm

South Pasadena, CA

Many adults work their whole lives, building their wealth to provide for themselves and their families. This desire to provide often survives death, as many people desire to build an inheritance large enough to provide for their children and grandchildren once they are gone. However, the desire to have sufficient assets to leave to descendants brings with it a dilemma. How do you leave assets to your children and grandchildren without marring their sense of hard work and accomplishment? A trust with incentive provisions might be the answer.

Using a Trust to Encourage Positive Behavior

By leaving assets in trust for the benefit of your descendants, you can retain added control over those assets after you are gone; control which is lost if the inheritance is left to the children outright. However, traditional trust terms provide for distributions based upon arbitrary methods. For example, a Trustee may be instructed to distribute income annually, or to make distributions of a portion of the trust principal at 5, 10, and 15 years after a parent's death. While these terms may be appropriate for many circumstances, where a person wants to encourage positive behavior, incentive provisions could be more effective.

What Are Incentive Provisions?

Incentive provisions simply authorize the distribution of trust assets to a beneficiary upon the beneficiary attaining a certain milestone. A new trust may be drafted, or provisions can be added to an existing trust, to promote certain behavior by the trust beneficiaries. A few reasons for creating incentive provisions are:

  • To assist a beneficiary who has chosen a noble, yet traditionally lower-paying, profession, such as teaching.
  • To match, in whole or in part, income earned by a beneficiary, thereby encouraging a beneficiary's employment.
  • To provide resources for a beneficiary to start his or her own business.
  • To reward a beneficiary for receiving good grades.
  • To provide an incentive to a beneficiary to graduate from a college, university, certificate or vocational program.
  • To provide assistance to a beneficiary who chooses to stay at home or work part-time in order to provide care for that beneficiary's minor children.
  • To help a beneficiary pay for the cost to adopt a child.
  • To encourage participation in social groups, such as the Girl Scouts, Boy Scouts, or Boys and Girls Clubs.
  • To provide funds for your beneficiary to travel to your homeland.
  • To allow a beneficiary to afford a first home purchase by providing funds for a down payment.

More Complicated Provisions

But if you feel these provisions alone will not support your heirs in a manner in which you and they are comfortable with, this doesn't have to be an "all or nothing" proposition. You'll need an attorney draft a trust with these incentive provisions as well as with provisions providing for the basic needs of the trust beneficiaries. Your heir's basic needs will be provided for, while at the same time productive behavior is encouraged.

But as good as these provisions sound, it is important to be practical when creating such provisions. Make sure that the behavior you encourage now is something that you will still want to encourage in the many years to come. Consider including different provisions that could apply to all your descendants, and acknowledge and embrace the differences between your beneficiaries.

When thinking about how to leave a legacy for your loved ones, consider the addition of incentive provisions to your trust. You'll gain the peace of mind in knowing you are fostering positive behavior in your heirs. If you encourage them while alive, there's no reason not to continue to do so after you're gone. Your heirs will appreciate your foresight in the long run.

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