Incentive Trusts, Day Two

What separates an Incentive 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.  In this type of trust, specific language is put into the Trust that incentivizes a beneficiary to do something the grantor wants performed.

Therefore, an Incentive Trust has an inherent “incentive” built in; it uses a “dangling carrot” effect to get the beneficiaries to do whatever the grantor deems appropriate.

What kind of things might a grantor incentivize the beneficiaries to do in order to be able to draw the assets?  A grantor might insist that their children or grandchildren finish school, for example, or reach a certain age before drawing benefits.

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

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

The article states, “Rich parents are always grappling with how to leave money to their children. Beyond the obvious questions — How much is enough? How much is too much? — they wonder whether the money should come with strings attached or just be given to their kids outright.

Inheritances that have strings attached are known as incentive trusts. They might stipulate that a kid can’t have access to his $10 million until he graduates from college or gets a job. Or they might say that the heir gets cut off if he or she is caught with drugs or abuses alcohol. Some are values-based, saying that an heir has to live up to the broader values of the patriarch in order to get the money.

In a survey out today, PNC says that 30 percent of high-net-worth individuals use incentive trusts. At the same time, 62 percent say their kids and grandkids should take responsibility for creating their own wealth.”

The Wall Street Journal writer goes on to add, “Incentive trusts are something of an oxymoron: You leave your kid a fortune, but attach conditions designed to mitigate the impacts of that fortune. It’s a bit like giving someone a lifetime supply of Haggen Dazs, but saying that they can only eat it if they agree to diet and lose weight. And if the conditions are values-based, then the parents are using money to impose their views and principles on their kids — another effective way of robbing them of their own identity.

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.”

In another article, this one from Bankaholic, entitled, “Motivate Your Heirs with an Incentive Trust” it is suggested that, “The key to successful incentive trust planning is flexibility. Remember that your heirs have their own goals and desires, which may never match up with yours. Choose the criteria for rewards and punishments wisely, and be sure to allow for contingencies such as disability or other misfortunes that could affect your beneficiaries’ ability to achieve the goals prescribed in the trust.”

Whichever opinion you take about Incentive 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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