It can be disconcerting to leave a significant lump sum inheritance to a particular loved one. For example, you may have a young adult in your family who has no experience handling large sums of money.
Under these circumstances, you could consider making this family member the beneficiary of an incentive trust.
To implement this approach, you would fund the trust and name a trustee to act as the administrator. Any competent adult who is willing to assume the role can technically act as a trustee from a legal perspective. This being stated, you want to engage a trustee who has the financial knowledge to administer this type of trust.
Since discretionary decisions will be made, your trustee should not have a personal relationship with the beneficiary. You do not want their objectivity to be clouded. Many people, who are in this position, will use a professional fiduciary, such as a bank or a trust company to serve as the trustee.
When you use a corporate trustee, you can rest assured that the assets will be handled in accordance with professional standards. The corporate trustee will have no conflicts of interest or heartstrings that can be tugged at. You would also have no longevity concerns. Plus, there would be inherent organizational oversight.
Getting back to our example about a young inheritor, in the trust declaration, you could allow for living expenses and tuition to be paid while the beneficiary is in college. The distributions for expenses could be contingent upon consistent school attendance with good standing.
You could allow for a lump sum distribution at graduation. You could also include incentives that would guide the beneficiary toward graduate school. To foster a work ethic, you could instruct the trustee to match every dollar that is earned by the beneficiary going forward.
The trustee could be given the latitude to provide larger distributions when the beneficiary reaches certain age thresholds. This is just one example of how an incentive trust can be used to provide for a family member in a constructive manner. There are also many other possibilities.
As a case in point, you could use this type of trust to encourage a loved one to avoid self-destructive behavior like substance abuse. In a real sense, you can include any stipulations that you want to as long as you are not requiring the beneficiary to break any laws.
An incentive trust can be the right choice for some people, but you have to be aware of the potential for ongoing resentment. Someone who is given an inheritance with all of these strings attached may get angry and rebel. This may be highly unlikely for some people, but it is something to keep in mind.
Download Our Inheritance Planning Worksheet
We have developed an estate planning worksheet that you can use to gain a thorough understanding of the process. People who have gone through it give us very positive feedback. Therefore, we urge you to take advantage of this learning opportunity.
We are offering the worksheet free of charge currently, so you have everything to gain and nothing to lose. To get your copy, visit our worksheet download page and follow the simple instructions.
Schedule a Consultation Today!
When you work with our firm, we will gain an understanding of your objectives and provide recommendations, so you can make informed decisions. When you decide to move forward, we will apply our expertise to create a custom crafted plan that is ideal for you and your family.
If you’re ready to get started, please contact our Oklahoma City office at 405-843-6100. You can reach our Tulsa location at 918-615-2700. We also have a contact form on this site you can use to send us a message.