Firm Publications

Legacy Incentive Trust

By Rebecca G. Doane, Esq. and Randell C. Doane, Esq., published in the Palm Beach Daily News, January 2007

A large inheritance can be a blessing or a curse depending on the choices made by the beneficiary. Where 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 their chosen important endeavors. 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 rich are not involved in business, the arts, philanthropy or any other worthwhile endeavor. 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 affects that substantial wealth may have on their children, grandchildren and future generations 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 the creators of the trust 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 family values. A legacy incentive trust allows the creators to specify the criteria surrounding their 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 standards they may choose which are of personal significance to them regarding the management of their wealth as it passes to younger family members.

As is the case with most estate planning trusts, the legacy incentive trust may be designed to benefit the surviving spouse, children, grandchildren and future generations. Of course, the incentive features of the trust will be applied differently to the various beneficiaries. In the case of a long-term marriage, 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. The trust may be written in such a way that the personal goals of the creators of the trust will be fully realized as wealth is passed from one generation to another.

Where 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 now. 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 trust 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 not only apply but may serve as a lifelong guide to choosing a path in life that would serve to achieve the goals of the creators of the trust.

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, and indeed the more “philosophical” of the two, involves the incentive feature where additional distributions are directly tied to the performance of beneficiaries in the realm of their personal goals and achievements.

Incentive distribution standards as determined by the creators of the trust may take into consideration a beneficiary’s achievement in education, entrepreneurship, personal financial success, benefiting society, or any other goals or qualities the creator may deem important. Incentive provisions can 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. It is in these areas that a legacy incentive trust can often be the “guiding hand” that steers future generations toward the path of life envisioned by parents or grandparents.

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

It is a primary consideration, as parents plan the future management of their accumulated wealth, that the legacy incentive trust is an important option available to them. This trust can provide guidelines which will influence their descendants in a very positive manner. It will also serve to provide some peace of mind for the creators of the trust that their personal objectives will continue to flourish even after they have passed away. A trust of this nature passes on inherent family goals, values and ideals. Properly designed, the incentive trust can provide important encouragement to future generations to make those life decisions that will result in productivity, accomplishment and self fulfillment.