Tuesday, June 28, 2011
The 2011 and 2012 $5 million lifetime gift tax exemption has given many parents an incentive to transfer large amounts to their heirs now, as opposed to waiting for the probate process to begin. Some parents are funding incentive trusts as a means of ensuring that their heirs are responsible with their windfalls.
In order for beneficiaries to receive funds from an incentive trust, they must meet milestones such as graduating from school, becoming a philanthropist, or obtaining a full-time job. The trust can also promote a strong worth ethic by instructing the trustee to distribute an annual amount equal to a beneficiary’s earned income. Incentive trusts also provide the grantor an effect means of escaping estate taxes and establishing a legacy for younger generations.
These trusts may have unfortunate consequences, however. For example, a beneficiary may attempt to manipulate the system in order to receive his or her inheritance. Additionally, if the distribution is tied to salary, beneficiaries may be punished under the trust for pursing low-paying jobs like teaching or becoming stay-at-home parent.
An alternative to an incentive trust is a results-oriented trust. These trusts focus on and reward desired results as opposed to the process by which the beneficiary achieves them. The grantor can structure a results-oriented trust to focus on any goal, and the trust can define the grantor’s values. This structure allows beneficiaries to develop the skills needed to effectively manage their wealth, while at the same time giving beneficiaries the freedom to make their own life choices.
For mor information on results-oriented trusts, see Shomari Hearn, Do Incentive Trusts Encourage Responsibility?, Palisades Hudson, Jun. 2011.
Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.