Incentive trusts allow grantors to implement Frank Sinatraís message.
Financial incentives contained in many employment contracts with business executives, designed to set objectives and reward performance, are the identical counterpart to a person giving away money or other property during life or at death in trust (a contractual equivalent). Spelling out incentives in trust documents also can set objectives and reward performance, but for members of a person's family, some of whom may not yet be born. It is a way of inculcating family values and assuring rules will be followed to produce desired results by "the person who signs the checks on the front," namely the donor, the creator of the will or at least the giver.
The tendency of some heirs to spend money quickly and without prudence has been demonstrated for centuries. In the words of one of this century's great investment advisors, "I want my children to have enough to do something, not enough to do nothing." This captures the imagination of those with the wherewithal to possibly destroy descendants with wealth-or, in the alternative, to provide standards that protect them and guide them in the right direction. This can be achieved without being overly restrictive, leaving ample leeway for discretion over the wealth to be exercised and for the basic needs of life-food, shelter, clothing, health, maintenance, education-to be guaranteed, while encouraging offspring to pursue their noblest ideals.
I remember well a successful businessman who had two children. He wanted them to go into his business, but recognized it was not likely because, frankly, they did not have his skill, determination and drive, or his financial acumen. But one thing he demanded-no restrictions would be placed on the tens of millions of dollars passing to them outright at his death. He had no one to tell him what to do with his money and "see how he turned out."
His words still echo in my ears: "No one is going to tell my kids what to do with my money. No obstacle shall be placed in their way." His two children were in their early twenties at the time of these statements, and the estate planning document was crafted as he desired. Ten years later, one child was a drug addict and the other a blatant spendthrift. Neither had any work ethic, and they thought spending their father's money for the rest of their lives was just the greatest thing in the world.
The father was disappointed, but faced up to the necessity of changing his estate plan. What did he do? He embraced the concept of an incentive trust, or better put, a trust with incentive provisions.
His documents to take effect at death were first changed to keep his children's share of his estate in trust for their lifetimes. No money was given outright anymore, only in the discretion of the trustee for health, support, maintenance and education. The trusts were equal as to amounts initially. The client's brother was named "trust protector," and only he could appoint a successor to himself. The brother could protect the trust in several ways. When the client died, the brother could change the trust to make the property easier or harder to get, depending upon the conduct of the children from time to time.
Against this general backdrop, there were specific provisions to guide his children and give them incentives to lead productive lives. Neither child had finished college, but if either did by the time they were 40, a $100,000 distribution would be made from the trust to the child outright, $200,000 if either graduated with honors.
If the drug-addicted child got treatment, the trustee would arrange for support payments to facilitate the treatment and an improved lifestyle; the same if the daughter stopped her spendthrift habits. To encourage work ethic, the child's earnings would be matched up to $500,000, so long as there was sufficient proof of a salary being earned, like a W-2 or a 1099, or other means of verification.
Distributions would be available for starting or engaging in a business if the trustee had a reasonable basis to believe the effort would be successful. Because of the trust being used, the children's creditors generally could not reach the trust assets, except in some states for child support, alimony or egregious personal behavior (for example, running into a school bus while dead-drunk and killing several kids). Business creditors would not be able to reach the trust assets, except possibly creditors for health, education, support and maintenance, and that could be avoided by lodging more discretion in the trustee.
I have had the chance, because of the passage of time, to observe what this specialized drafting accomplished. The child with the drug problem did get treatment, did get incentive payments and lives in a more or less permanent halfway home, but does have his dignity. The life ahead of him may not lead to a Nobel Prize, but he is alive. The other beneficiary finished college and, with her $100,000 payment and additional discretionary assistance from the trust, started a fairly successful dress manufacturing business. She and her assets are safe.