Incentive Trusts vs.
Discretionary Trusts
Trusts are flexible legal instruments that can be drafted to accomplish
a diverse array of estate planning goals. One of the areas of
flexibility concerns how much freedom the trust Grantor gives to the
Trustee in terms of making distributions. Trusts can be broadly
categorized into “discretionary trusts” and “incentive trusts.”
Incentive Trusts
In an incentive trust, the Trustee has guidelines and limits for
distributions based on the class, status, and/or behavior of
beneficiaries. These guidelines and limits are drafted to
give effect to the Grantor’s intent for the handling of trust
property. In practice, distributions are often made
contingent on the beneficiary’s completion of certain conditions; hence
the beneficiary has an incentive to do what the Grantor wanted them to
do. The basic message to the beneficiary is, “If you do X, Y,
and Z, then you will get more money from the trust.”
Common Incentives
Some of the most common incentive provisions in trust documents include:
Education
- Attainment of college degree
- Matriculation at a particular school
- Achievement of a particular grade point average
Behavior
- Marriage or re-marriage
- Procreation
- Place of residence
Gainful employment
- Work in a particular field
- Work in the family business
- Start a new business
- Matching of income reported on a W-2
Negative behaviors
- Drug and alcohol abuse
- Gambling
- Crime
A basic example of how an incentive provision in a trust might look is,
“Mary will receive $1000 per month from the trust until she is
thirty-five years old. When and if Mary earns a bachelor’s degree, the
Trustee shall make a one-time $25,000 distribution to Mary from the
trust. If Mary earns her degree from Whitman College, then said
one-time distribution shall be $50,000.”
Discretionary Trusts
In a discretionary trust, the Trustee may exercise his or her
discretion in making distributions. In a “fully discretionary trust”
the Trustee has a high degree of freedom in deciding how best to handle
the trust property, and the timing and amount of distributions to
beneficiaries. This is the most common type of trust, because it is the
most flexible and it is the least costly to draft. The disadvantage to
putting so much discretion in the hands of the Trustee, however, is
that the behavior of the beneficiaries may not be influenced according
to the Grantor’s wishes.
The more complex a trust is, the more important it is that it be
drafted correctly by an experienced attorney.
Contact Burkhart and Burkhart
today to create a trust that
distributes assets
to the people and organizations you wish to benefit, at the time and in
the amounts that you desire.
Contact Us
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(509) 529-0630
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(509) 525-0630
Mail:
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Walla Walla, WA 99362
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Walla Walla, WA 99362
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