INCENTIVE TRUSTS

“Medieval alchemists failed to turn lead into gold. Wealthy twenty-first century parents fear a reverse alchemy. Will their children transmute inherited gold into leaden lives—hollow, shallow, self-absorbed, addicted, indolent, meaningless, wasted?

“The potentially corrupting influence of unearned wealth is not a new or novel concern. However, the Healthy Wealth Movement introduced new and novel prescriptions for parents’ gilded angst. Healthy Wealth advocates insisted that the corrupting influence of money can be minimized by enlightened giving, withholding, or controlling. To parents already preoccupied with money, a money solution seemed sensible—like fighting fire with fire.”

From Betsy’s dissertation draft in Le Van, Raising Rich Kids, pp. 32-33.
“Generous trusts created by her second husband guaranteed lifetime support for their twins, Sallie’s only children. The twins’ trusts were laced with financial incentives and disincentives advocated by the Healthy Wealth Movement. If giving or withholding trust funds could foster good behavior and discourage the bad, Sallie’s children would become model citizens.”

p. 37.

Several years ago a front page Wall Street Journal story reported that star pitcher Tom Glavine of the Atlanta Braves had created incentive trusts for his three sons. As long as a son remained married to a stay-at-home mom, there would be trust distributions; otherwise, none. At the 2003 annual meeting of the American College of Trust and Estate Counsel an expert panel discussed the pros and cons of incentive trusts.

Many incentive trusts authorize distributions equal to the beneficiary’s earned income i.e. “earn a dollar, get a dollar.” Others reward educational achievement or the avoidance of alcohol or drugs. One parent instructed the trustee of his chronically late children to make trust distributions only to those who showed up at the appointed place on time.

Incentive trusts seem most popular with the new entrepreneurial wealthy who grew up with middle class values and had no experience with “trust babies.” They fondly quote Warren Buffet: “I want my children to have enough to do anything but not enough to do nothing.” New wealth seems more controlling of their children than old wealth.

The ACTEC panelists suggested that external standards of behavior ignore the more important goal of fortifying the beneficiary internally. The incentive trust imposes outside control instead of encouraging the beneficiary to develop internal controls, emphasizing conformity over personal growth and maturity.

Incentive trusts curtail trustee discretion over distributions by substituting objective standards for beneficiaries’ behavior. “Incentivizing” behavior essentially supplants the traditional trustee-beneficiary relationship. Instead of functioning as mentor, model and coach, the trustee becomes a referee.

The ACTEC panel distinguished trust distributions that honor “benchmarks of maturity” such as graduation, marriage, the birth of children, etc. from incentive trusts that reward what the child would not otherwise do. They were particularly concerned with incentive trusts’ narrow definitions of desirable and undesirable conduct and their failure to define larger family values and principles.

All agreed that incentive trusts may be useful for incorrigible children who might otherwise be disinherited by parents who have done all they can without success. Disappointed parents—and the major religions—still hold out hope that the most wayward children may yet change their ways.

In lieu of incentive trusts, the ACTEC panelists encouraged cooperative ventures such as family limited partnerships and family charities. Here the beneficiaries are involved, receive information and participate in decisions even though may don’t control the enterprise. In the room with their parents, they collaborate on prudent investing and the financial expression of family values.

One ACTEC panelist advocates a “productivity trust” with a mission statement that defines what the family wants its members to do and be, with guidelines towards accomplishing those ends. A trust advisory committee meets frequently with beneficiaries, freely sharing information. The greater collaboration and sharing between beneficiaries and trustees, the less likely the tensions between them.

We have long questioned the wisdom of incentive trusts and applaud this thoughtful ACTEC panel whose combined estate planning experience reaches the same conclusion. Active collaboration between parents and children on family limited partnerships and family charities can reinforce those vital internal gyroscopes that help guide children through a murky world.

Near the end of Raising Rich Kids (p. 123), Betsy has a conversation with psychologist Dr. Nether, who observes:
“Isn’t it ironic that it’s time to teach our children before we know ourselves. At best we grow up along with them and we learn together with them. It’s called parenting.”

“So we and our children search together for answers to their money questions?”

“I think so.”

“Aren’t those the best answers, the answers you discover together?”

“Inside answers instead of outside answers.”

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