Family Values

April 4, 2008

Will passing on your wealth be a blessing or a curse to your family? Watching the antics of spoiled rich kids is daily entertainment for much of America's television audience, and most of us are so far removed from their world, we have little empathy for their problems. But imagine dealing with a self-image as reflected by the paparazzi and living under the microscope of a press corps eager to broadcast your every misstep. Unless you keep a low profile, you risk becoming the family laughing stock.

Today's trust fund baby is stereotyped as lazy and decadent, rather than as a future leader of our society. Yet too many deal with intense guilt about their wealth and live unhappy, sometimes tragic lives.

Not every child of privilege lives a wasted life, however. Most grow into high-achieving adults. They are often the children of entrepreneurs who treated philanthropy with the same fervor they approached the development of their businesses. Most have been raised to be responsible people, and many are successful in their own rights. But as future generations become more removed from middle-class values, the work ethic and philanthropic values often become dissipated. There may come a time when an heir's only achievement is based on the sheer luck of being born in the right family.

Unlike the British royal family, the American elite are not typically groomed to find a useful and rewarding way to benefit society. Nor will the family legacy assure them a place in the family's corporation or on the board of directors of the nation's banks. The unaccomplished and inexperienced heir is unlikely to be invited to oversee a charitable foundation's endowment because the family name is no longer a sure ticket to pulling in donations. Today, stockholders expect a high level of competency in corporate leadership, and donors will not tolerate supporting an ineffective head of a public charity. The endorsement of a sports or film star seems to be more clamored for than were the Rockefellers'.

So, how do we provide guidance to our grandchildren or great-grandchildren so that they embrace the hard-work ethic that created the family's wealth and elect to make a major contribution to the business world and society? More and more parents are incorporating their value systems into their estate plans in the hope that their wealth will be used to encourage and reward industriousness, personal development, creativity and philanthropy in future generations.

A Trust With Incentives
Trusts have been used for centuries to preserve family wealth while providing a comfortable standard of living for the trust's beneficiaries. A traditional trust pays all net income to the surviving spouse and, at the spouse's death, distributes each beneficiary's share of the trust principal as he or she reaches a certain age or milestone, such as college graduation. A more flexible version may give the trustees the discretion to retain and manage the trust principal past the normal distribution age, based on the trust beneficiary's needs or situation.

An incentive trust goes one step further. The trustee is instructed to reward those who work hard, invest wisely and accomplish worthy goals. It distributes enough money from the trust to ensure that the beneficiaries are comfortable but not enough to underwrite a lavish lifestyle or to discourage earning a living. Essentially, the trust becomes a family bank, and beneficiaries may apply for and prove the merits of distributions over and above their basic living needs. The trustee might finance a business venture, provide the down payment on a home, match earnings from work, or fund educational or missionary sabbaticals. Trust beneficiaries may be required to submit "grant" proposals or business plans to the trustee to qualify for special distributions.

To encourage a work ethic, the trust could be authorized to match beneficiary employment income up to a limit. To avoid rewarding only the already financially successful heir, a point system might be assigned to give extra credit for homemaking, volunteer work, public service or socially significant careers, such as teaching.

A well-constructed incentive trust will serve as a safety net for legitimate emergencies, medical needs and care for a special needs or disabled beneficiary, including supporting a beneficiary who chooses to play a caretaker's role.

An incentive trust can also have a charitable element. The trustee may be authorized to distribute income in excess of the beneficiaries' needs to charity. Beneficiaries are encouraged to research and make recommendations for grants to charitable organizations.

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