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What is an incentive trust?

The term “trust” describes a rather versatile set of estate planning devices. There are many different kinds of trusts a person could include in their estate plan here in Massachusetts. The different types of trusts vary in what they can do and what kinds of goals they are aimed at helping with.

Today’s post will be focused on one particular type of trust: the incentive trust.

Incentive trusts are trusts that make it so payouts from the trust to a beneficiary are contingent on the beneficiary doing, or not doing, certain things. So, such trusts could be used by a person to encourage or discourage certain behaviors among family members or friends after they have died.

The types of things an incentive trust could tie payouts are numerous: from employment, to charitable work, to choice of profession, to schooling, to family situation. Such trusts could take a carrot approach, in which certain activities would trigger a payout or up the amount a beneficiary would receive. Or they could take a stick approach, in which certain actions would disqualify a beneficiary from payouts or lower the amount they would receive.

Now, there are some things that could get in the way of an incentive trust achieving the goals a person intended it to. One is if the person tries to use an incentive trust in a way the law of their state doesn’t permit. Different states have different rules on what sorts of things a trust can’t make payouts contingent on.

Another is if the trust isn’t well-designed. When care isn’t exercised when it comes to what terms an incentive trust has, the trust could end up doing things other than what the beneficiary intended.

So, there are many things it can be important for a person to think about when deciding whether to have an incentive trust in their estate plan and, if they are including such a trust, what sorts of terms to have the trust include. Understanding what sorts of things would and wouldn’t help with the types of goals they have can be critical when preparing for and making these kinds of estate planning decisions. This is why carefully discussing ones goals with an estate planning attorney and getting guidance from such an attorney on what options could help with these goals can be such critical thing.

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