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Incentive Trust: children, examples, considerations, uses

Posted on: March 15, 2017 at 6:09 am, in

Incentive Trusts offer the Settlor the ability to set conditions or clauses in a Trust Agreement for the protection of the wealth and to avoid abuse of any inheritances. We look at some examples with the children and spouses of when the Incentive Trust should be considered.

A Trust “Agreement” is a contractual obligation for the maintenance of health, support, and education of beneficiaries. The Agreement may have incentive clauses, the purpose of which is to encourage family members to achieve personal satisfaction in their lives and their dependents.
An Incentive Trust is an estate tax planning tool designed to encourage or discourage certain behaviors by the beneficiaries by using distributions of trust income and/or principal as an incentive or as the piece of cheese in a mouse trap to get the desired response. A typical Incentive Trust might encourage a Beneficiary to complete a college degree, enter a profession, or abstain from harmful conduct such as substance abuse. The Beneficiary might be paid a certain amount of money from the trust upon graduating from college, or the trust might pay a dollar of income from the trust for every dollar the Beneficiary earns.
Without being overly restrictive, trust documents can be written in such a way to cover beyond the basic needs of life, food, shelter, clothing, health, maintenance, education, and other guarantees to the well being of the beneficiaries. The trust document can include emergency clauses for the preservation of life of the beneficiaries to the full extent of trust funds. After all, what good is the money if beneficiaries are ill, disabled, or dead? Setting objectives and rewards for family members, not yet born is a way of anticipating an expectation of desired family values and assuring rules will be followed to produce the desired appreciation for the meaning of life.

Some incentive clauses and examples of Incentive Trusts:

Upon graduating a four year college of their choice (not basket weaving) the Trustee will write a check for the equivalent amount of the four year tuition plus 20% bonus for above average performance.
With proof of a W-2 or 1099 or other similar documentation, the Trustee will match the amount reported by 5 times the state earnings.
If a Beneficiary decides to go into business and the Trustee sees a reasonable chance of success, the Trustee will become the silent fund partner to the business plan.
Upon marriage, the Trustee will throw the wedding, the trust will buy the house, the trust may loan money to the spouse for business purposes, etc. at the sole discretion of the Trustee.
Other terms of the trust agreement may include staggered distributions over the ages of the beneficiaries, i.e. age 21 a distribution 5% of the Trust Corpus, 25, 30, 35, and so on in order to give anticipation of a new fresh start. We don’t know the maturity of the child, the acquired skill sets, the business acumen, spending habits, whether they marry, therefore Incentive trusts are a tactical way of saying that trust fund babies are not acceptable.
Other terms dictating distributions to wives, significant others, or other similar terms used to identify the Beneficiary’s relationship may be expressly excluded from ever becoming beneficiaries. This is to avoid potential threats to trust funds or unpleasant/ unwanted events.

The negative or con of an Incentive Trust:

This type of thinking within the trust agreements captures the imagination of the person who worked so hard to achieve success not to destroy those who he leaves behind without a lack of objectives, purpose, or meaning to their lives. The negative side of Incentive Trusts is that it becomes an inflexible instrument because the Settlor cannot foresee all potential problems, eventualities, and circumstances beyond the short duration of what was intended.

Incentive Trust example in action:

I was recently visited by a very successful business man who escaped Russia under extreme hardship, immigrated to the United States and became a very successful hard working entrepreneur. The business man expressed complete disgust in how his wife and children were performing. The wife was a blatant, out of control, spendthrift shop-aholic. The daughter, in her early twenty’s had taken-up with an ear, mouth, belly piercing jerk, adding tattoos to her body “embellishing the marks of slut.” Son number one just over the age of 21 was coming home all times of the night, receiving occasional calls from the police, putting his lawyer to work on keeping his son out of jail. Son number two was 180 degrees to the opposite, a star performer in a private school, quiet, reserved, but never came home or called, and kept to himself, I guess he was ashamed of his family.
Disappointed, the business man embraced the concept of an Incentive Trust, or better said, a revision to his existing Trust Agreement with incentive provisions, to take effect after his death. The key ingredient was the addition of the Trust Protector with powers to oversee the Trustee. He appointed his long time and good friend as the Trust Protector with specific powers to help his children lead more productive lives. Neither of his two older children had finished college, he had an incentive of a direct $350,000 distribution if either of them graduated. He made provisions for counselling and support payments for the duration of treatment and an improved lifestyle for his older son. To encourage his wife from aimless spending he would match and fund any business venture she actually participated. In addition, the Trust Protector took the immediate role of business wealth manager of Trust Assets and investment decisions. Additionally, he made provisions for direct distributions only to direct descendants to his children and grandchildren. If his wife remarried, none of the distributions would go for the maintenance of the new husband.
Please contact Estate Street Partners at (888) 938-5872 or (508) 429-0011 for more infomation on the Intentionally Defective Grantor Trust and how you can protect your assets with our top Ultra Trust® irrevocable trust plan.

Special Needs Trust

Posted on: March 15, 2017 at 6:08 am, in

By setting up a special needs irrevocable trust, parents of these children can create an account that will contain assets to be used to care for the special needs child after the parents pass away. One of the most beneficial ways to fund these accounts is through life insurance, using death benefits upon the passing of the parent to fund the trust for the child.

How to use life insurance for a Special Needs Irrevocable Trust

When trying to determine how to use life insurance in a Special Needs Irrevocable Trust, it is important to know what “special needs” entail. This is in reference to any child who has health-care needs, physical, developmental, or mental conditions that impairs their ability to function in a normal manner. Many of these special needs children will require additional assistance to perform daily tasks.
Special needs can be caused by different reasons, including physical and mental conditions. Common physical conditions can include heart defects, chronic conditions like diabetes, cerebral palsy, cystic fibrosis or dwarfism. Mental conditions can include retardation, ADHD, Tourette’s Syndrome and Autism.

Statistics of Special Needs

Based onstatistics gathered from Cornell University, more than 2.6 million children between the ages of 5 to 15 have a disability that qualifies them as being special needs. Out of those children, 30% have multiple disabilities.

Helping Parents with a Special Needs Child

The mentioned statistics may be truly unfortunate; however, there are many advisors who are able to give advice to parents and caretakers in regards to financial planning because there are special opportunities for these children and their parents. Most parents want to take care of the child the best they can even if they are not around to do so, and this includes financially.

Financial Aid for Children Over 18

If a child reaches the age of 18 and is unable to earn wages and support themselves in a financial respect, they may be eligible to receive funds from Social Security Income. They can also be eligible to receive health services through the state in the form of Medicaid.
However, it is also possible for these benefits to end immediately if the special needs child has any assets that total more than $2,000. This does not include the ownership of a home or vehicle. Each quarter, disabled individuals are only allowed to receive $60 of unearned income. This is a government regulation. The individual must also be unable to earn more than $500 a month. This is a harsh restriction preventing the special needs child to ever be able to sustain himself/herself and makes the child completely reliant on the parent(s) and government assistance.
When special needs children turn 18, Federal assistance can be applied for and for many parents, the amount that could be received will not offer much help. In these cases, parents will continue to use their own funds and assets to provide care for the child for the remainder of their life.

About gifting to special needs children

When gifting to a child with special needs, there are some common errors that are often made. These include:
  • Gifting money or assets to the special needs child directly. This could cause the financial aid to cease providing the child is more than 18 years old.
  • The identical problem could occur if money is gifted after the child’s parent or grandparent has passed away.
To protect this from happening, parents who have special needs children should change where the assets of the beneficiary are assigned to. These should be immediately changed to a special needs irrevocable trust, including assets and money in IRAs and 401(k) plans.

Explaining Special Needs Irrevocable Trusts (SNTs)

When planning for the well being of a special needs child, it is important to consider the child’s welfare after the passing of the parents or the caregiver. This is one of the main fears that parents face. They often wonder who will care for the child and if the level of care will be enough to enable the child to life a fulfilling life.
To make sure that the child is, in fact, cared for in an appropriate way, a special needs irrevocable Trust can be established. To ensure that the child will be able to continue receiving financial aid, all gifts must be made to a trust in which the child is the beneficiary.
Since the assets will then be the property of the irrevocable trust and not the actual child, the assets that are located within the irrevocable trust cannot be counted as assets when considering financial aid eligibility.

How to Fund a Special Needs Irrevocable Trust

Life insurance is one of the best tools to use when looking to fund an irrevocable trust for a special needs child. This is because when the parents die, the death benefit from the life insurance policy will be in the trust without any income, gift, or estate taxes. That money will later be used to care for the child with special needs until his or her death.
In short, these trusts are irrevocable trusts and the trustee will have complete discretion on how the assets are to be used. The trustee will handle and manage all distributions from the trust. When this is done properly, all assets in the trust will be used for the caring of the child and will in no way disqualify the individual from receiving financial assistance from the state.