Family & Parenting

Leaving Your Legacy

LEAVING YOUR LEGACY

Providing heirs with incentives to earn their inheritances

By Rebecca G. Doane, Esq. and Randall C. Doane, Esq.

A large inheritance can be a blessing or a curse depending on the choices made by the beneficiary. Whether a child or grandchild who has inherited sizeable wealth chooses to focus on entrepreneurial, artistic, family, charitable or other worthwhile goals, he or she will have an extraordinary opportunity to experience great achievement in his or her field of interest. On the other hand, if the child or grandchild does not choose wisely, a substantial inheritance can compromise their opportunity to experience the satisfaction and fulfillment that would come from great success in important endeavors of their choosing.

The legacy incentive trust is designed to encourage children, grandchildren and future generations to make intelligent and thoughtful choices that will more likely lead to lifelong satisfaction and personal fulfillment.

Unfortunately, experience shows that a very high percentage of third-generation wealthy is not involved in business, the arts, philanthropy or any other worthwhile endeavors. More often than not, a substantial inheritance serves as a disincentive to creativity, learning, undertaking challenges or assuming risks that could lead to happiness, fulfillment and self-esteem. Parents who worry about the negative effects substantial wealth may have on their heirs may want to consider the advantages of a legacy incentive trust.

A legacy incentive trust will achieve the usual estate planning goals of probate avoidance, tax reduction and asset protection. However, a well-drafted incentive trust will also encourage and incentivize future generations to acquire those qualities and values that you deem important. The terms of the trust can be used to motivate future generations to develop a sense of productivity, diligence, dedication and curiosity, and to foster education, stewardship and your family values.

This type of trust allows you to specify the criteria that you would consider when making distribution decisions. Therefore, where appropriate, distributions can be tied to attainment of specified goals and values such as education, accomplishment, hard work, integrity, contribution to society and any other standard you choose.

For young children, grandchildren and future generations, the distribution plan often consists of two elements. The trustee is first directed to pay for basic needs such as education, health, modest living expenses and possibly the maintenance of family homes or other facilities. The second element involves the incentive feature where additional distributions are tied to the beneficiary’s performance.

Incentive distribution standards may consider achievement in education, entrepreneurship, personal inancial success, benefiting society or any other goals or qualities you deem important. Incentive provisions may be as simple as an earned income match, or may factor in a number of other concerns such as the income potential or the benefit to society of a chosen career. Provisions may be included to discourage negative behavior such as substance abuse, or to encourage positive behavior such as philanthropy. Of course, the incentive features of the trust apply differently to the various beneficiaries. In the case of a long-term arriage, the trust will often provide broad discretion during the lifetime of the surviving spouse to distribute income and principal among the surviving spouse, descendants and charities as appropriate. After the death of the surviving spouse, the incentive features of the trust will affect distributions to the grandchildren, and may or may not be applied to the children.

When the children are fully grown, and have already developed the qualities and interests they will likely always have, there may be little point in trying to incentivize them at that point. If the parents themselves have not succeeded in developing well-adjusted and productive children, the trustees will likely do no better. Therefore, the provisions for grown children typically require distributions of a fixed amount or percentage of the trust annually, with the remaining income being reinvested or distributed among grandchildren or charities, including a family foundation. For young children who are still developing the level of drive, ambition and integrity that will be theirs for a lifetime, the incentive features of the trust will apply.

An incentive trust should be flexible so that distribution guidelines can evolve over time provide for emergency situations such as a divorce, chronic health issues or severe economic conditions. The choice of trustees is a critical issue and the appointment of a board of trustees may be appropriate during the incentive phase of the trust.

The legacy incentive trust is an important option available to wealthy parents wishing to influence their descendants in a positive manner for generations to come. It permits the passing on of family goals, values and ideals. Properly designed, the incentive trust can provide important encouragement to future generations.

Rebecca G. Doane, Esq. and Randell C. Doane, Esq. are board certified attorneys in Wills, Trusts and Estates with offices in West Palm Beach, North Palm Beach and Stuart.