Your initial estate planning efforts may consist of nothing more than executing a Last Will and Testament that ensures your assets will be distributed according to your wishes in the event of your sudden death at an early age. You will, however, undoubtedly elaborate on that plan as you acquire more assets and as your family expands. Eventually, your estate plan will likely include a wide range of estate planning tools, one of which may be an incentive trust. The Glastonbury trust lawyers at Nirenstein, Horowitz & Associates, P.C. discuss how an incentive trust might fit into your estate plan.
Understanding Trust Basics
A trust is a fiduciary arrangement that allows a third party, referred to as a Trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. All trusts can be broadly divided into two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason unless a court grants the right to revoke or modify the trust.
What Is an Incentive Trust?
Trusts are often used in lieu of, or in addition to, a Last Will and Testament as a mechanism to pass down an inheritance. Parents often use a trust to protect the inheritance of a minor child because a minor cannot inherit directly from a parent. A trust also allows you to stagger the distribution of an inheritance instead of handing over a lump sum to a beneficiary who isn’t emotionally, or practically, ready to handle a large sum of money. An “incentive trust” adds yet another layer of protection and pragmatism to the inheritance you plan to leave behind.
As much as we would all like to believe that our children will manage an inheritance with the utmost care and frugality, the reality is that a young adult who is handed a sizeable amount of money for the first time isn’t always responsible with that money. The term “incentive trust” is an informal name given to a trust that encourages good behavior by the beneficiaries of the trust. Usually, an incentive trust is a revocable living trust; however, you could also use a testamentary trust or even an irrevocable living trust. A revocable living trust is usually chosen though because it offers you the ability to modify the terms of the trust while you are still alive.
A trust becomes an incentive trust through the use of the terms of the trust. Carefully worded provisions in the trust guide the behavior of the beneficiaries. As the Settlor, you decide what you ultimately want from a beneficiary and then create trust terms that elicit that behavior. For example, if it is important to you that all beneficiaries receive a higher education, you might include trust terms that only allow disbursements to pay for higher education expenses or terms that require beneficiaries to maintain a certain grade point average in order to be entitled to disbursements. Incentive trusts are also commonly used to encourage beneficiaries to overcome addictions, settle down and start a family, pursue specific careers, or become involved in philanthropy. As the Settlor of the trust, you can use your incentive trust to encourage, or discourage, any type of behavior that is important to you.
Contact Glastonbury Trust Lawyers
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how an incentive trust might fit into your estate plan, contact the experienced Glastonbury trust lawyers at Nirenstein, Horowitz & Associates, P.C. by calling (860) 548-1000 to schedule an appointment.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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