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Incentive Trusts: Long Arm of the Dead? by Harry S. Margolis


Many affluent parents are concerned about the effect of leaving any wealth to their children and grandchildren. In some instances, they fear that the recipients will misspend the funds on drugs, fancy cars or failing businesses. In other cases, their fear is simply that their children will simply lose their drive to achieve and overcome barriers that may present themselves if there's no financial necessity to do so. At the same time, these parents and grandparents want to provide a safety net to their heirs and enhance their lives in an increasingly insecure financial system. Often they do so by leaving funds in trust for their descendants, often with little guidance to the trustees on what to do with the money. But some parents get very specific in their instructions to trustees so that they support what they view as positive behavior and discourage unproductive activities.


Some years ago I had clients whose son adopted an orthodox version of Judaism. He had many children. His sons were encouraged to spend their days in religious studies, his daughters to get work to support their husbands. My clients disapproved of this on a number of levels, hoping that their grandsons would find productive work and that their granddaughters would not be restricted to lives of drudgery. Their trust provided direct support to their granddaughters while they had small children, but their grandsons would only receive funds from the trust to match what they earned on their own, dollar-for-dollar up to a certain level.


Here are a number of other incentive trusts we have seen or helped draft, some simply paying the costs of certain activities and others providing rewards for achieving various milestones:


1. Rewards for degrees. Cash amounts that descendants receive on achieving specified educational milestones.


2. Matching earnings.


3. Paying for education. Especially with the high cost of private universities today, grandparents often set up funds to help pay for the education. Some funds are more expansive than others in terms of what they will cover. Just undergraduate degrees, or also graduate programs. Only for higher education, or also for learning a craft or a trade. Will the fund pay for private school before college? Will it cover educational programs during the summer, including travel overseas? Room and board, or just tuition? Some of these decisions will be determined by the size of the fund and how far it needs to stretch.


4. Creating charitable foundation or donor advised fund. I have a client with three highly-successful sons. They don't need her money. But she would like them to be more charitably inclined than they have been to date. She has toyed with the idea of leaving some or all of her estate to a private foundation or a donor advised fund, requiring her sons to give away a certain amount every year.


5. Subsidizing public service career or Peace Corps. We live an an increasingly financially insecure world which often forces people to take or stick with careers they don't find fulfilling or don't feel further the public good. Parents or grandparents could fund trusts that don't match all earnings, but just those they feel make the world a better place. This may be hard to define and will, of course, be different from fund to fund. It may include working for any not-for-profit -- though some are quite well funded -- or teaching or political organizing -- but for what causes?


6. Distribution upon marriage or having a child.


7. Matching downpayment for house.


8. Reward for period of time being alcohol or drug free.


Through these incentive trusts, parents and grandparents hope that their money will go to causes they support. On the one hand, this approach can multiply the benefit of what they pass on. On the other, it may seem to some like they are trying to continue to exercise control much too long after they are gone. Often the older generations split the difference, giving some funds outright to their descendants and leaving the rest in trust.

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