do we pass our wealth on in a way that is respectful,
responsible, and in accordance with our values? Some advisors
advocate "incentive trusts" as a partial answer
to this sticky problem. We asked two experts on inheritance
to discuss the pros and cons of these specialized trusts.
This brief excerpt from their discussion is meant to stimulate
thought and conversation.
Myra Salzer is founder
of The Wealth Conservancy (www.thewealthconservancy.com),
a financial coaching firm for people with substantial
inheritances. Since 1989, Salzer has led
Wealth and You
, an annual four-day retreat where inheritors
explore the effects of wealth on their lives.
Barbara Blouin is an inheritor
and co-founder of The Inheritance Project (www.inheritanceproject.
com), which publishes books, essays, and articles on the
emotional and social impact of inherited wealth. Blouin
is author of
The Legacy of Inherited Wealth: Interviews
For Love and/or Money: The Impact
of Inherited Wealth on Relationships
Let me begin by saying
that I hate the name "incentive trusts" because
it makes them sound like a bribe, rather than trusts that
encourage the beneficiary to do things that are aligned
to the donor's values. Some donors base disbursement on
attaining a degree, or on marriage; some match earned
income, or what the beneficiary raises to start his or
her own business; some enable the beneficiary to not have
to earn money while raising children. The incentives really
can be whatever the grantor wants.
People set up incentive
trusts because they want to be responsible in the way
they give. They don't want to take away from their heirs
a sense of purpose or accomplishment, or even just a reason
to get out of bed in the morning
Let me point out that
although I have interviewed many inheritors, I have never
interviewed anyone with an incentive trust. But I have
been working for three months on an article subtitled,
How to Prepare Your Children for an Inheritance. The conclusion
I've come to is that I don't think people should give
their children a lot of money. As Myra said, if they inherit
a lot of money, what reason do they have to get out of
bed? I also have concerns about parents who set up incentive
trusts to encourage their children to behave according
to the parents' values. I believe that if parents raise
children well and model the values they believe in, their
children will internalize them.
I agree. That's why the
incentive trusts I've been involved with are testamentary
trusts (that is, trusts that are formed as a result of
the donor's death). If the parents won't be around to
teach the values they believe in, they feel incentive
trusts will help to replace the financial guidance that
they won't be able to give themselves.
Of course, it's not easy
to anticipate what circumstances will arise down the road,
so it can be very difficult to draft incentive trusts
well. I always recommend that donors make sure the trusts
stay relevant in a wide variety of circumstances, such
as whether or not the beneficiary has their own children,
and that they consider a wide variety of values- philanthropy,
education, entrepreneurship, and so on. A good trust has
to give the beneficiary choices.
Still, I believe that
children should be free to develop their own values. Growing
up, my money was very heavily controlled, and so that
view comes partly from my own experience. At some point,
a person has to be master of his or her own destiny; parents
who pass money along should be prepared for the possibility
that their kids won't make good use of it. That's my bias.
I'm struggling with this
with one of my own children. He's 24 and is supporting
himself because any time I give him money, he blows it.
If I died next week, my will says he would have a trust
with my husband as trustee. My son could get the money
only under certain circumstances. But when he reaches
35, he's getting the money.
A potential problem I can
see is that if you create a trust that leaves it up to
the trustees to determine whether the beneficiary is doing
something that is deserving of distribution, it really
puts the beneficiary in a powerless position. I prefer
trusts where distribution is made no matter what happens,
such as "trickle trusts." These make distributions
at a series of ages, say five years apart. So at 21, the
beneficiary receives $10,000, at 25 they get more, at
30 more, and at 35, they get the rest. At that point,
there is no more trust and no further conditions.
But in the real world,
people don't generally get money just because they reach
the age of 21. When people act and receive a reward as
a result, they feel ownership for their money; if it's
given, whether from a lottery or a lawsuit or an inheritance,
there's a disassociation between them and their money.
They're not integrated with it.
That's a good point. However,
in the case of incentive trusts, even though the money
is "worked" for, it comes from the parents,
not an employer. The trust can still be perceived as Daddy
making me do what he wants me to do. Of course, if there
is a more positive relationship between donor and beneficiary,
it may not be experienced that way at all.
That's why finding good
trustees, who really understand the grantors' values and
intentions, can make or break the trust. I recently helped
draft a trust that made my clients' children trustees
for the grandchildren. That way my clients won't be denying
their children the ability to parent, but the money will
still skip a generation, as planned. The grandchildren's
parents will be cotrustees who together decide on distributions
for tuition, philanthropy, or the family foundation.
Yet, each child is unique
and different, and if grandparents are the grantors, there's
often no way to know what the beneficiary's money habits
will be like. If two kids are ages eight and twelve and
it's already obvious that they relate to money very differently,
should the terms of the trust be the same for each, or
That's the beauty of incentive
trusts: options. Someone can choose to do distributions
for one child related to anthropological work in Africa, and distributions for
the other to encourage entrepreneurship. If one's a dancer,
let that one dance! Then the distributions will be more
meaningful and appreciated, because they will enable the
beneficiary to pursue his or her passion. That's what
a trust should do, rather than deny the beneficiary a
desire to have a passion.
In theory, it sounds good.
In practice, we're not going to know how well they work
until we actually see a number of people who grow up and
inherit incentive trusts. We really haven't seen the results
yet. They may work very well, or there may be problems
we can't foresee.
There's a responsibility
that comes with wealth: how to steward it properly, how
to pass it on properly, and how to have it be a tool to
support your purpose, rather than a burden that keeps
you from accomplishing your purpose. That's what we're
really talking about.
by Eli Pariser
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