First Quarter, 2009

As many of our clients know, the irrevocable trust is an integral component of any estate plan designed to protect inherited monies from the spendthrift or intemperate habits of children, grandchildren and other beneficiaries. Frequently, clients ask us to write trusts that provide for staggered partial distributions to their loved ones over time, as contrasted with outright lump sum distributions after both parents have passed. This planning philosophy has spawned the creative legal drafting of “Incentive Trusts”, which describe in detail the events or behaviors (the “incentives”) which will trigger cash distributions to beneficiaries. However, is the Incentive Trust really a new idea, or is it simply a catch phrase describing a planning technique attorneys and clients have been using for years? No matter, because whether it’s thought of as “pop rock” or an “old standard”, the basics of the Incentive Trust are and have been as follows:

1. The client identifies positive behavior he or she wishes that the beneficiary pursue (i.e. advanced education, gainful employment, philanthropy, etc.).

2. The client and attorney thoroughly evaluate the practicality of encouraging the productive behavior in a manner that does not disrespect the beneficiary or violate public policy.

3. The attorney drafts the trust consistent with the client’s objectives; examples include…

X dollars distributed to Johnny upon his graduation from college (education incentive)
X dollars distributed to Mary for every Y dollars of W-2 income earned by her annually (employment incentive)
Matching distributions to Joey for contributions by him (of time or money) to local charitable organizations (philanthropic incentive)

There are countless other positive behaviors and valued accomplishments which could be encouraged by an Incentive Trust. However, this planning tool is not appropriate for every client. Without deliberate forethought and meticulous drafting, an Incentive Trust could serve to demoralize a beneficiary (for not achieving stated expectations) or could easily create administrative nightmares for the trustee. Nevertheless, in the right circumstance and with experienced counseling, carefully designed Incentive Trusts have integrated nicely into estate plans furthering the testamentary wishes of clients while providing monetary and intangible benefits to loved ones.

Please feel free to contact any of the attorneys in our estate planning department if you are interested in exploring the feasibility of an Incentive Trust in your case.

* Thanks Yogi !

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