Monday, March 4, 2019
J. Sam Rodgers recently publish a Note entitled, Do You Tru$t Your Children: A Parent's Final Dilemma, 28 Cornell J.L. & Pub. Pol'y 93-125 (2018). Provided below is an abstract of the Note.
If you knew you would inherit millions of dollars as long as you married someone Jewish, would you scour the Synagogue next Friday night?
This was the situation Daniel Shapira faced. Daniel was a twenty-one-year-old undergraduate at Youngstown State University when his father, Mr. Shapira, died. Mr. Shapira conditioned a portion of his large fortune to Daniel: the document read either be “married at the time of my death to a Jewish girl whose both parents were Jewish . . .” or the inheritance will go to “the State of Israel.” In the United States, unlike in other countries, a decedent has almost full control over the distribution of his assets upon death. Mr. Shapira used his power to incentivize his son to adhere to family values and marry within the Jewish faith.
Many parents view the distribution of their assets at death as the final impact they have on their children. Historically, most parents took this opportunity to provide future financial security for their heirs. Today, parents are confronting a recently developed fear of their children inheriting too much. This fear leads to a controlling dynamic between parents’ fortunes and their children’s lives. Scholars relate the situation to the “carrot and the stick” analogy, by which parents incentivize their children—many times adult children—to make wise choices by dangling a “carrot” in front of their children, then string them along like a masterful puppeteer.
Courtesy of American inheritance law, children can be disinherited by their parents. The harsh consequences of complete disinheritance have led to the development of conditional bequests—parents will give inheritances to their children so long as their children behave properly. The most prevalent form of a conditioned inheritance is the “incentive trust.” An incentive trust allows parents to condition distributions of trust property. These conditions are “as unlimited as our imagination,” so long as they do not contradict public policy or call for beneficiaries to break the law. Theoretically, this solves a “parent’s final dilemma”—whether to pass wealth on to children and possibly stunt motivation and character, or leave children less inheritance, but instead, helpful principles and inspiration. Incentive trusts allow parents to do both by separating the benefits of bequeathing property to children from the risks of bequeathing too much property. This is done by passing fortunes only after children align their lives with criteria enumerated in the trust.
However, incentive trusts are not a perfect solution and should be used with caution in estate planning. Incentive trust shortcomings are fourfold. First, incentive trusts are inflexible, making them difficult to draft and leaving them exposed to litigation. Second, the law confers a public policy limitation that produces inconsistent enforcement of incentive trusts. Third, incentive trusts promote idolizing money, thus potentially diluting the initial incentivized behavior. Fourth, rewarding children with money often has a negative impact on their motivation.
Part I of this Note discusses both the development of the law regarding inheritance and the growing attraction to incentive trusts. Part II details the four traps of incentive trusts—inflexibility, public policy limitations, unintended consequences, decreased motivation—and opens the door for a new solution to a parent’s final dilemma. Part III examines four principles for crafting a better solution to the parent’s final dilemma by looking at those who have successfully inspired children without incentive trusts. Part IV proposes the new solution, termed a Hidden Bonus Trust, that avoids the identified traps of incentive trusts and incorporates the lessons from experts.