Incentive Trusts vs. Discretionary Trusts | SW&L Attorneys

You are getting to a point in your life where you want to start thinking of your family’s future. You have decided to create an estate plan. Estate planning is a broad term used to describe the process of anticipating and arranging for your death or disability. More to the point, it is the process of taking care of yourself and the people you care about when you are unable to do it yourself. (Note, regardless of your age, it is never too early to consider what you want to have happen should unfortunate circumstances arise). The purpose of this article is to explain two approaches when your intended beneficiaries are in two very different positions.

Let’s say you have two adult children. The first child, a mature, successful person who is excellent with their finances. The second, a child who, whether it is due to addiction, debt, or “affluenza,” cannot maintain financial stability. The second child is the focus of this article.

How can you provide the best support to the second child? You could treat the two children exactly the same, giving 50% of your assets to each child outright. However, by doing this you could be inadvertently fueling the second child’s underlying issues. The second route, you could create a comprehensive estate plan to provide for this child while ensuring any assets they receive are not squandered away to fuel their underlying issue.

Discretionary Trusts

One of the ways to address this issue is to set up a trust with discretionary distributions for the support of the second child. A trust with discretionary distributions will allow the trustee to make distributions to the second child for things such as the child’s health, education, support, and maintenance (HEMS). However, in the interest of preserving the trust property (corpus), the trustee is given discretion on whether to make the distributions. This means a trustee can essentially watch over the child, and if in the trustee’s opinion, the child will use or has used trust distributions in the past in a harmful way, the trustee can stop or limit the distributions until the child can adequately handle the new finances. The benefit of this type of trust is that it allows the trust to operate with flexibility. This type of trust allows for the child to be given the exact amount of support that will be most beneficial to them at the specific moment in time. There is, however; another approach a person can take.

Incentive Trust

A person can also create what is referred to as an incentive trust. An incentive trust essentially focuses on what the child’s issue is, and as the name would suggest, incentivizes the child to correct that issue with a trust distribution. A common example is awarding a certain percent of the trust property for maintaining 12 months of sobriety. Another common example is providing for distribution for every year the child is gainfully employed. The good thing about this type of trust is that it hones in on exactly what the child’s issue is at that time and attempts to rectify it. This allows you, the settlor, to have a laser precision say in exactly when and how much the child will receive while encouraging the child to better themselves.

Estate planning can be quite complicated. This article would hardly scratch the surface of estate planning if it were 1,000 pages long, but these two types of trusts may be able to provide you with peace of mind while taking care of the people you care for.

If you have any questions regarding trusts or other estate planning documents, or if you would like to know which estate planning tool would best fit your individual circumstances, please contact our Estate Planning Team at 701-297-2890 or send us an email below.

The information contained in this article and on this website is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.

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