DEFINITION of 'Incentive Trust'

A legally binding fiduciary relationship in which the trustee holds and manages the assets contributed to the trust by the grantor. In an incentive trust arrangement, the trustee must adhere to specific requirements set out by the grantor regarding what conditions the trust's beneficiaries must meet in order to receive funds from the trust.

BREAKING DOWN 'Incentive Trust'

An incentive trust operates as a sort of "conditional inheritance" for beneficiaries named in the trust. For example, say an aging investor wants to leave a certain proportion of her wealth to a grandchild, but she also wants to ensure that the inheritance money does not lessen the grandchild's drive to pursue a professional career or a higher education. By leaving the inheritance funds to the grandchild in an incentive trust, the grantor can specify that the funds are to be dispersed only once the grandchild has obtained an undergraduate degree, for example (or any other legally permissible requirements the grantor may wish to set out).

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