Value Oriented Trusts Have Increased Appeal to Wealthy
By Andrew T. Wolfe, CPA, JD, LLM

"The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would." -- Andrew Carnegie

These comments made over one hundred years ago by industrialist Andrew Carnegie continue to have meaning today. In fact, with significant wealth now being accumulated by more people than ever before - 3.5 million American households today have a net worth of $1 million or more - one does not need to be a member of the aristocracy (or an entertainer or professional athlete) to struggle with the question of "How much wealth do I want my children to have (and when)?"

This is a question that many moderately wealthy individuals, not to mention the enormously wealthy, are asking themselves and their advisors.

Many clients feel, with justification, that passing on wealth to their children can be counterproductive to them. They are concerned that it will restrict the development and ambitions of their offspring. They are also concerned that an inheritance can be quickly lost or diminished if left in the hands of an unprepared or reckless heir. Additionally, from a legal perspective, a trust offers protection against creditors, or a spouse in the case of a divorce.

As a result, more and more clients are considering "value-oriented" or "incentive trusts." Instead of giving descendants an automatic entitlement to their assets, they have opted to use the principal and income from these trusts to influence the behavior of their children.

I recently asked one client what he thought would be a proper inheritance for his children. He said, "Enough so my children could do anything, but not so much that they could do nothing." This articulates the way many people feel.

A value-oriented trust both holds and manages assets for individuals inexperienced or incapable of such matters, and is intended to promote family values and foster fiscal and social responsibility within the family. It allows parents to set up a series of parameters that create incentives for certain behaviors. This can be tied to educational accomplishments, business or professional success, skill at managing money, and/or family considerations.

These trusts are typically designed to continue for the life of a beneficiary. In attempting to positively influence the conduct of an heir, the trustees may choose to distribute trust property if they determine that the beneficiary is personally and financially mature. This can be based on age or other factors.

Wolfe offers the following examples of trust incentive provisions:

• A beneficiary’s entitlement to a percentage of trust income for the income they earn (e.g. $1 of trust income for each $2 of earned income)
• Distributions to supplement the income of a family member who works for a charity or stays at home with children
• Monetary rewards for good school grades or the attainment of specific degrees
• Enhanced distributions from the trust as a result of marriage, starting and maintaining a family and/or starting or investing in a business the trustees consider acceptable

In addition, disbursements can be tied directly to a percentage of the inheritance that is donated to charity.

The trust creator may also choose to impose negative sanctions. This may include holding back trust distributions if the beneficiary performs certain actions or fails to live up to certain standards in the eyes of the trustees (who have been appointed to see that the wishes of the benefactor are followed).

Some of the wealthiest people in this country have been against a repeal or substantial reduction of the death tax because they believe the tax offers certain societal benefits. If there is no estate tax, it only means more money goes to offspring who may not be prepared for it. This has to be of concern to anyone who has read or heard of the negative impact a large inheritance can have on the productivity of the generations that follow.

For more information, please contact Andrew T. Wolfe, CPA, JD, LLM, at (973) 403-6906.