Between now and 2049, an estimated $51 trillion in wealth will be transferred between the baby boomer generation and their children, grandchildren, favored individuals, and charities of choice. This intergenerational wealth is absolutely staggering, especially in light of how many states decline to administer an estate tax and the fact that the federal marker for triggering any estate tax obligations is somewhere around the $22 million mark.
Historically, to ensure that one’s intended beneficiaries not lay to waste decades of intelligent wealth-building, the funders of various trusts would create age-based distribution mechanisms for disbursement. If you were putting $3 million in a trust for two children, you might only provide that they receive $100,000 at the age of 25, $250,000 at the age of 30, $500,000 at age 35, until the funds were extinguished.
As a rudimentary estimate, it is not foolhardy to rely upon the passage of time as a proxy for maturity and hope that your intended beneficiaries will be more capable of handling gifted wealth as they get older.
However, my preference is incentive-based trust provisions that rely upon objective criteria tied to the acquisition of certain desirable knowledge rather than merely reaching a certain age.
For instance, an incentive-based trust provision might state that it is necessary to complete a personal finance course offered by the bank in order to receive a distribution of $X, or alternatively, pick up 12 credits in personal finance from an accredited college’s personal finance offerings. This type of incentive trust provision ties relevant self-education to the actual disbursements, which I consider laudable.
Interestingly, most incentive-based trusts that exist provide disbursements upon getting married, buying a house, having a child, or some criteria. I have never cared for these types of provisions because they are no guarantees of financial responsibility. Signing a document that grants a security interest against some land with a house on top of it gives no indication about your financial responsibility—and the same with marriage. Foreclosures and divorces do exist.
Of course, many incentive-based trust provisions “miss” the point. The one true aim, if a child is a beneficiary, should be raising him or her in a way that you don’t need to exercise dead hand control beyond the grave to bring about desired behavior. But if it must be done, incentive-based trust provisions tied to financial literacy is superior to age-based distribution in that a skill is being required as a condition precedent to the disbursement rather than merely “aging yourself” into a disbursement of wealth.
As an aside, I find it interesting that many people in the estate planning industry have strong blanket opinions on whether or not incentive-based trusts should exist, rather than the old familiar standby view of saying “It depends on the situation.” The critics view the provisions as treating beneficiaries like puppets and the proponents view incentive-based trust provisions as an opportunity to simulate “earning” and “accomplishment” into something that would otherwise literally be free money. I fall into the “it depends” camp. There are some people who cannot help but self-sabotage themselves when left to their own devices, and it makes sense to provide a sturdy hand. Other beneficiaries have common sense and maturity, and do not need artificial hardships to lead a valuable life. Knowing the personal habits of an intended beneficiary, therefore, seems to be the most critical factor in knowing whether a trust fund should contain any incentive provisions.
Note: This article should be read for entertainment purposes only, and should not be relied upon as legal advice. If you are thinking of setting up a trust fund with an incentive-based trust provision, you should coordinate this with an attorney and a suitable financial professional.