Purpose Trust

Like an Incentive Trust, in a Purpose Trust, assets can be held in trust for a particular purpose, like paying for a person’s education.

What separates a Purpose Trust from any other type of Trust arrangement is that the beneficiaries must adhere to specific requirements set out by the grantor in order to receive assets from the trust.

Like all Trusts, an Purpose Trust is a legally-binding legal tool in which a designated trustee holds and manages assets which have been funded into the trust by a grantor, but in this type of trust, specific language is put into the Trust that incentivizes a beneficiary to do something the grantor wants performed.

Therefore, a Purpose Trust has an inherent “incentive” built in; it operates as a sort of “dangling carrot” or “conditional inheritance” for beneficiaries named in the trust.

What kind of requirements might a grantor input to incentivize the beneficiaries to perform in order for the beneficiaries to be able to draw the assets?  A grantor might insist that the beneficiaries are gainfully employed or graduate college, for example; truly the options are limitless and are entirely up to the grantor to decide.

People have wildly divergent opinions of Purpose Trusts; many agree that they do actually incentivize people; others do not.  Here are two examples of those differing points of view.

In an article from Bankaholic entitled, “Motivate Your Heirs with an Incentive Trust” it is suggested that, “You may have some reservations about their ability to use their inheritances wisely. One way that you help them to make the right choices is by establishing an Purpose Trust. This type of trust can provide financial rewards to your heirs for accomplishing certain objectives that you consider beneficial.”

The article goes on to add, “There could be a reward for carrying on a family business, or achieving some other personal or professional goal. Conversely, destructive behaviors, such as gambling or drug addiction can cut off trust assets as well.

However, if not written wisely, these trusts can also present your heirs with problems. Making unreasonable demands of your beneficiaries can lead to resentment and create other problems for them. For example, if the trust will only pay assets to an heir that is willing to continue the family business, then a beneficiary that happens to have other aspirations in life will be faced with what may be a rather substantial dilemma.”

The Wall Street Journal has a very strong opinion about Purpose Trusts; in fact they have an article dedicated to them that is entitled, “The Wrong Way to Leave Money to Heirs.”

The article bottom lines it this way, “So here’s my advice: If you really want to mitigate the effects of large fortunes on your kids, don’t leave them a large fortune. Let them find their own careers and success, rather than using money to dictate from the grave.”

Whichever opinion you take about Purpose Trusts, if you question if one is right for you and your heirs, please seek the advice of a qualified estate-planning lawyer.

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