August 30, 2006

$ & Sense

Can a Trust Help Promote Your Family's Values?

Is a trust able to enforce your family's values? Maybe, maybe not, but there is currently a trend among wealthy individuals to establish "family incentive trusts" for other family members, with the aim of fostering responsibility and social consciousness among their offspring.

Incentive trusts are not new but seem to have become more popular. These irrevocable trusts typically include a series of goals or accomplishments that a beneficiary must achieve before sharing in his or her family's wealth. These identified goals and the resulting trust benefits are often based on academic, financial, professional or philanthropic accomplishments that are to be achieved by the beneficiary over time.

For example, an incentive trust may provide that the trust's beneficiary shall receive funds only after graduating from college with a certain grade point average. Or the trust may be set up to distribute funds as part of a matching formula based on earnings from employment. The trust could stipulate that no funds are to be paid from the trust if the young person is involved in drugs or other illegal activities. Other requirements might include community activity or involvement with certain charitable organizations.†

Critics of family incentive trusts suggest that this is a way for wealthy individuals to "rule from the grave" or to improperly "bribe" descendants into a certain mode of behavior or lifestyle.

Despite the criticisms, family incentive trusts can appeal to high-net-worth individuals. When carefully written and disclosed to family members, this kind of trust can provide an incentive for children to live goal-oriented, productive lives. However, it is important that the trust document be carefully drafted to include broad language that covers emergencies as well as legitimate mistakes a young person may make.

Selecting a trustee is an important decision in setting up any trust. You may choose a family member or close friend as trustee, but this person might not be objective or could be too removed from family decision-making to see that the grantor's intent is carried out. An impartial, experienced professional trustee can be in a good position to help ensure that provisions drawn up in the trust document are applied consistently.

Your financial advisor can provide more information about trusts and can help you decide which strategies may work best for your individual needs and goals with the help of your tax and legal advisors. Be sure to consult your tax and legal advisors, though, before making any tax or legal decisions.

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