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Should you create an incentive trust for a loved one?

Most Illinois parents and grandparents have high hopes for their children and grandchildren. They want to see them succeed in life and may take steps to ensure that they have an incentive to achieve their goals.

You may be one of those parents or grandparents, and as you engage in estate planning, you may wonder whether you can do something to help and inspire them even after death. You may be able to execute an "incentive trust" with a particular loved one as the beneficiary. Of course, the trust must remain within certain legal limits and needs to be correctly handled in order to stand up to any legal challenges.

Let's start with what you can't do in an incentive trust

Some requests would go against existing legal protections, laws and public policies. For instance, you can't encourage a loved one to break the law in order to receive distributions from the trust. You can't dangle an inheritance in front of a loved one to get him or her to divorce a spouse you don't like. You also can't require a loved one to adhere to or leave a particular religion. You get the idea, but if you have questions about whether your idea for an incentive trust would not make it past a judge, you may want to ask an attorney.

What can you do in an incentive trust?

Most incentive trusts intend to help improve the life of a loved one. Consider the following examples:

  • The trust may pay for a certain number of years of college education. You could stipulate that the student maintain a reasonable grade point average in order for the trust to pay college expenses.
  • The trust may match retirement funds or income dollar for dollar up to a certain amount each year. You may decide to stipulate that distributions up to a certain amount be allowed in hard economic times, such as if a job loss occurs.
  • The trust may discourage the use of drugs. You could require drug testing prior to a distribution. Successfully completing a rehabilitation program may also trigger a distribution.
  • The trust could reward taking certain paths in life. If you own a business that you want the beneficiary to take over, distributions from the trust could provide the incentive to do so. Perhaps you support the option for one parent to stay at home with the children instead of pursuing a career.

As you can see, there are numerous ways you could support a loved one, even after death. However, none of it will work properly without the right trustee. Your trustee may have a great deal of discretion when it comes to distributions, and that person should understand your wishes and be willing to carry them out on your behalf.

Drafting and executing an incentive trust

It would more than likely be in your best interest to discuss your desire to use an incentive trust with an Illinois estate-planning attorney before taking any further steps, to be sure that what you want to do is legal and will stand up in court.

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Leonard F. Berg, Attorney at Law