Estate planning isn’t just about sharing wealth with the younger generation. For many people, it’s equally important to share one’s values and to encourage their children or other heirs to lead responsible, productive and fulfilling lives. One tool for achieving this goal is an incentive trust, which conditions distributions on certain behaviors or achievements that you wish to inspire.

Incentive trusts can be effective, but plan and draft them carefully to avoid unintended consequences. Let’s examine four tips to consider when designing an incentive trust.

1. Focus on positive reinforcement

Avoid negative reinforcement, such as conditioning distributions on the avoidance of undesirable or self-destructive behavior, for example, gambling or drug use. This sort of “ruling from the grave” is likely to be counterproductive. Not only can it lead to resentment on the part of your heirs, but it may backfire by encouraging them to conceal their conduct and avoid seeking help.

Trusts that emphasize positive behaviors, such as going to college or securing gainful employment, can be more effective. Plus, accentuating the positive tends to discourage negative behavior; it’s difficult for a substance abuser to stay in school or hold down a job.

2. Be flexible

Leading a worthy life means different things to different people. Rather than dictating specific behaviors, it’s better to establish the trust with enough flexibility to allow your loved ones to shape their own lives.

For example, some people attempt to encourage gainful employment by tying trust distributions to an heir’s earnings. But this can punish equally responsible heirs who wish to be stay-at-home parents or whose chosen careers require them to start with a low-paying, entry-level job or unpaid internship. A well-designed incentive trust should accommodate nonfinancial measures of success.

As you think about the incentives you wish to provide, avoid the temptation to “buy” desired behavior. Suppose, for example, that your trust provides generous distributions to a daughter who cares for her children full time. But what if she really wants to work outside the home? If the “stay-at- home bonus” is too large, she may feel she has little choice. A better approach is to reward your heirs for a variety of positive options and allow them to choose their own paths.

3. Consider a principle trust

Drafting an incentive trust can be a challenge. Rewarding positive behavior requires a complex set of rules that condition trust distributions on certain achievements or milestones, such as gainful employment, earning a college degree or reaching a certain level of earnings. But it’s nearly impossible to anticipate every contingency.

What if your heir becomes disabled and can’t work or chooses to be a stay-at-home parent? What if your heir takes a low-paying job with a charity or not-for-profit organization? What if your heir forgoes college to pursue a worthy vocation, such as construction or auto repair? On the flip side, what if your heir becomes a “professional student,” using the trust funds to pursue one impractical college degree after another?

One way to avoid unintended consequences is to establish a principle trust. Rather than imposing a complex, rigid set of rules for distributing trust funds, a principle trust guides the trustee’s decisions by setting forth the principles and values you hope to encourage and providing the trustee with discretion to evaluate each heir on a case-by-case basis. Bear in mind that for this strategy to work, the trustee must be someone you trust to carry out your wishes.

4. Provide a safety net

An incentive trust need not be an all-or-nothing proposition. To keep your heirs off the street, offer sufficient funds to provide for their basic needs and base additional distributions on the behaviors you wish to encourage.

A balanced approach

According to Warren Buffett, the ideal inheritance is “enough money so that they feel they could do anything, but not so much that they could do nothing.” A carefully designed incentive trust can help you achieve this goal. Talk to your estate planning advisor for more details.

© 2022

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

Few things can derail your estate plan as quickly as unanticipated long-term care (LTC) expenses. Most people will need some form of LTC — such as a nursing home or assisted living facility stay — at some point in their lives. And the cost of this care is steep. According to a 2021 survey by Genworth, the national median cost of a private room in a nursing home is about $9,000 per month. For assisted living facilities, the median cost for a one-month stay is about $4,500, while home health aides cost more than $5,000 per month.

windfall that you can use for yourself or your family. The risk, of course, is that your LTC expenses will be significantly larger than anticipated, eroding the funds available to your heirs.

Any type of asset or investment can be used to self-fund LTC expenses, including savings accounts, pension or other retirement funds, stocks, bonds, mutual funds, or annuities. Another option is to tap the equity in your home by selling it, taking out a home equity loan or line of credit or obtaining a reverse mortgage.

Two vehicles that are particularly effective for funding LTC expenses are Roth IRAs and Health Savings Accounts (HSAs). Roth IRAs aren’t subject to minimum distribution requirements, so you can let the funds grow tax-free until they’re needed. And an HSA, coupled with a high-deductible health insurance plan, allows you to invest pretax dollars that can be withdrawn tax-free to pay for qualified unreimbursed medical expenses, including LTC. Unused funds may be carried over from year to year, making an HSA a powerful savings vehicle.

LTC insurance

LTC insurance policies — which are expensive — cover LTC services that traditional health insurance policies typically don’t cover. Determining when
to purchase such a policy can be a challenge. The younger you are, the lower the premiums, but you’ll be paying for insurance coverage during a time that you’re not likely to need it.

Although the right time for you depends on your health, family medical history and other factors, many people purchase these policies in their early to mid-60s. Keep in mind that once you reach your mid-70s, LTC coverage may no longer be available to you.

In evaluating LTC insurance, be sure to find out whether your employer offers a less costly group LTC policy. Also, consider whether tax benefits are available to offset some of the cost. (See “Tax benefits for long-term care” above.)

Hybrid insurance

Hybrid policies combine LTC coverage with traditional life insurance. Often, these take the form of a permanent life insurance policy with an LTC rider that provides for tax-free accelerated death benefits in the event of certain diagnoses or medical conditions.

These policies can have advantages over stand-alone LTC policies, such as less stringent underwriting requirements and guaranteed premiums that won’t increase over time. The downside, of course, is that to the extent you use the LTC benefits, the death benefit available to your heirs will be reduced.

Life insurance exchanges or settlements

If you have a permanent life insurance policy, it may be possible to do a tax-free exchange for a traditional or hybrid LTC policy. Alternatively, it may be possible to do a “life settlement,” in which you sell a permanent or term life insurance policy for its current value and use the proceeds to fund LTC expenses.

Weigh your options

There are several potential strategies for funding LTC expenses. Work with your professional advisor to review your financial and health circumstances, weigh your options, and develop a plan that meets your needs.

© 2022

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

As a business owner, your company is likely your most valuable asset. And you know that you must account for it in your estate plan to help ensure that it remains a valuable asset for your heirs. Thus, a key goal should be to insulate your company and other assets from the claims of creditors and lawsuits.

When you create an asset protection plan proactively, you add a layer of protection before any claims or lawsuits arise. This can deter creditors and possibly thwart the seizure of assets.

Ownership structure matters

Depending on the structure of your business, you may have adequate protection from creditors, minimal protection or none at all. Thus, you might consider changing the ownership structure to create a corporate shield. Here are the three primary forms of ownership:

C corporation.

Generally, a C corporation provides limited liability exposure to the personal assets of its principals. There’s no personal liability for corporate debts, contract breaches or personal injuries to third parties caused by the corporation or its employees. So, a creditor can’t seize your personal assets if the corporation can’t pay its bills. This is a distinct advantage over traditional partnerships.

But be aware of an exception for certain personal services. For example, a physician might be held personally liable for damages incurred while performing services on behalf of a medical practice. In other situations, personal liability may be attached if the corporation has no significant assets and doesn’t really act as a separate entity.

S corporation

With an S corporation, income and losses are passed through to shareholders on a personal level, thereby avoiding “double taxation” faced by C corporations. Like a C corporation, however, shareholders benefit from some corporate liability protection, albeit with additional limits as to the number and type of shareholders, allocation of profits and losses among shareholders, and the type of stock that may be issued to investors. For many business owners, an S corporation is the preferred choice.

Limited liability company (LLC)

An LLC operates much like an S corporation without some of the extra formalities. Significantly, LLC principals are afforded the same liability protection as those in a C corporation, along with the favorable “passthrough” tax benefits available to an S corporation.

Note that filing requirements and creditor protections for LLCs may vary from state to state. Nevertheless, state laws generally protect personal assets of LLC owners from claims based on LLC activities.

Build asset barriers

Most asset protection strategies for businesses involve putting up walls between a company and its assets. One way to do this is to divide the business into separate entities.

For example, you may want to form separate entities to conduct any business activities that are riskier than others. Doing so allows you to limit the liability risk associated with them. Provided the entities are structured and operated properly, you can prevent creditors from going after assets owned by other entities within the group, even if they have common ownership.

Another way to protect valuable business assets is to sell them to another entity created by the company’s owners and then lease them back. If done right, these assets no longer belong to your company, so they’re beyond the reach of the company’s creditors.

Talk to the professionals

Owning a business is a big responsibility, and you want your children to benefit from your hard work after you’re gone. Thus, it’s important to implement business asset protection strategies. Because these strategies can be complex, talk to your business, estate planning and legal advisors to determine your best course of action.

© 2022

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

When planning for the disposition of your estate, it’s critical to understand what happens if a child or other beneficiary predeceases you. There’s no one right way to deal with this contingency, but to avoid unintended results your estate plan should spell out, with precise language, how your estate should be divided among loved ones.

The distribution method you choose can make all the difference

If you use incorrect or vague language, you could unintentionally disinherit family members. For example, two common distribution methods are per capita, which means “by the head,” and per stirpes, which means “by the branch.” Let’s suppose that Zeke has three children — Abe, Betty and Carl — and that Abe has three children and Betty and Carl each have one child. If Zeke leaves his assets to his children
per capita, then they will be divided equally among them. If Abe predeceases Zeke, then his assets will be divided equally between Betty and Carl, effectively disinheriting Abe’s three children. Had Zeke left his assets to his children per stirpes, then Abe’s children would have split his one-third share.

Another distribution method is by representation, under which all members of the same class or generation are treated equally. This method works similarly to per stirpes unless more than one child predeceases you.

Going back to the previous example, suppose that both Abe and Betty predecease Zeke. If his assets are distributed by representation, then Carl would receive one-third, while Abe and Betty’s children would split the remaining assets four ways. Under the per stirpes method, Carl would receive one-third, Betty’s child would receive one- third and Abe’s children would split the remaining third three ways.

If the language in your estate plan is vague, or you fail to specify a distribution method, state law may designate a method by default.

© 2022

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.