Tag: Incentive Trusts
A recent New York Post article discusses the estate of the late Maurice Laboz of Manhattan, who left $20 million to his two daughters, Marlena and Victoria, 21 and 17 respectively, to inherit when they turn 35. However, Mr. Laboz has also provided a number of ways in which the girls can gain access to some money in the meantime.
For example, if Marlena graduates from “an accredited university” and writes a short essay, to be approved by the trustees, she will receive $750,000. The Testator also included a provision which will triple their salary each year, providing an incentive for them to work hard and earn a good salary, and not just to rely on their inheritance.
There are also restrictions for Mr. Laboz’s daughters. He has included a term of the trust such that, if they decide to have children and not to work outside the home, they will receive 3% of the value of their trust every year. But, if they have a child born out of wedlock, they will not receive any of the money allotted for this purpose.
I recently tweeted this post from Elder Law Answers, which discusses incentive trusts. As illustrated by Mr. Laboz’s trust for his daughters, an incentive trust is a way to provide for your loved ones, while retaining some control over the way the money is spent. Such trusts may have very specific instructions to ensure that the trust funds support positive behavior, and discourage unproductive or harmful behavior. Some of the types of incentives can include rewards for degrees, or matching employment earnings, as discussed above. An incentive trust might also include funds to match the down payment on a house, or to reward doing charitable or volunteer work. An incentive trust may also try to deter harmful behavior, such as drug use, by providing a reward for undergoing treatment for addiction.
As noted by BMO Nesbitt Burns, incentive trusts have seldom been used in Canada and can be difficult to design and administer. In particular, selection of Trustees for an incentive trust is critical, due to the great deal of discretionary powers they can exercise over distribution of trust funds. But if you have good advice on setting up a Trust, it may be a way to ensure that your loved ones’ inheritance will be well spent.
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The oft-repeated phrase "unprecedented transfer of wealth" has been invoked by estate planners and financial advisors alike to describe the pending inheritance by the children of baby-boomers. But what if they don’t inherit that wealth? Several months back, Warren Buffett raised more than a few eyebrows when he very publicly announced a commitment to benefit the Bill & Melinda Gates Foundation, rather than his children, with the bulk of his estate. And he is not alone.
Enter "The Trust Fund Whisperer" as Dr. Lee Hausner was described in a recent article in The Globe and Mail (October 16, 2007), Dr Hausner is a psychologist who, as Siri Agrell so succinctly put it in her article, "is paid to tell families how to avoid screwing up their children with their cash." A lot of cash, that is, if the title of her book Children of Paradise: Successful Parenting for Prosperous Families is anything to go by. Essentially, Hausner challenges what she sees as a culture of entitlement enjoyed by the wealthy elite by arguing in favour of fostering a strong work ethic. Agrell’s article provides a well organized summary of Hauser’s approach together with some of her key recommendations such as: (i) paying for expenses rather than transferring substantial wealth to a child during their career building years and (ii) when transferring cash, spreading the payments in three installments over a prolonged period rather than in one lump sum.
Certainly, trust and estate practitioners play a key role in implementing such recommendations. The increasing popularity of such estate planning techniques as incentive trusts (detailed in a transcribed podcast and an audio podcast on our website) can be seen as a response to the thesis espoused by Hauser and others.
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Listen to "Protecting Your Children’s Inheritance"
Read the transcribed version of "Protecting Your Children’s Inheritance"
During Hull on Estate and Succession Planning Podcast #49, Suzana Popovic-Montag and Jordan Atin discuss considerations and techniques to ensure the proper use of inheritances. Some of these techniques include staggered inheritances, incentive trusts and charitable foundations.