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What is an incentive trust?

Parents and grandparents generally feel fortunate when they have considerable assets to pass on to younger generations in their family. However, how can you assure that they'll handle their inheritances wisely?

Even responsible people can lose perspective when they inherit a significant amount of money -- spending it on things they had never even considered before. They can also become prey to unscrupulous "advisors" as well as friends and acquaintances asking them to invest in a sure-fire-success business venture. Both can ruin their lives and leave them worse off than if they'd received nothing.

Many people these days want the inheritance they leave to their loved ones to be about more than money. They want to pass on the values they hold dear and the lessons they've learned. How do you incorporate those into your estate plan.

One way to do this is by creating an "incentive trust." You designate a trustee to make distributions to the beneficiary based on the requirements you designate.

For example, you may want your grandchildren's inheritances to be used only for their education, to buy a home (perhaps within a certain price range), to start a family or to create a business. Some people designate a higher inheritance if the beneficiary graduates from college.

It's up to you as the grantor to place whatever terms on the trust you choose, providing that they aren't so nonsensical or wrong-headed that a court won't enforce them. For example, a judge likely won't uphold your wishes that your grandchild marry a person of a specific race in order to receive his or her inheritance. It's also good to discuss your reasoning behind those terms with your trustee and your beneficiaries, if they're old enough.

Of course, sometimes people's lives are beset by unforeseen circumstances such as a health crisis or the loss of a home due to an earthquake or other act of nature. You can designate in your incentive trust that the funds can be disbursed for such emergencies.

Your California estate planning attorney can work with you to set up an incentive trust to help ensure that your loved ones can benefit from your hard work and good fortune and that your values will be passed on to future generations -- even those not yet born.

Source: Huffington Post, "Passing Values, Not Just Money, via Incentive Trusts," Steve Cook, accessed May 24, 2017

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