Self-made real estate developer Ray Fontaine has created nearly 30 personal trusts. But the one closest to his heart is a new vehicle that he hopes will help his heirs understand the dignity and self-assurance that hard work provides a person. It is a dynasty trust—an entity typically designed to benefit heirs in perpetuity while shielding assets from creditors and generational estate tax burdens—that will be funded with about 10 percent of Fontaine’s multimillion-dollar estate, according to Seth Pearson, Fontaine’s wealth advisor at Pearson Financial Services in Dennis, Mass.
But Fontaine’s dynasty trust comes with a twist. Rather than making outright distributions, it will match heirs’ employment earnings on a dollar-for-dollar basis for men, and two dollars for each dollar earned for women. (Fontaine seeks to make up for the traditional disparity in pay levels between the sexes, he explains in his trust’s mission statement.)
“Earned financial security, rather than inherited financial security, promotes self-respect, a sense of self-worth, peace of mind and a host of other benefits,” the octogenarian argues in the document. “Whoever has Fontaine blood in their veins will have a chance to earn a living.” Those in future generations who decide not to work will not benefit from his largesse. The trust is designed to pay each individual heir up to $200,000 each year for as long as there are assets to do so, provided those heirs produce copies of a 1040 tax form and W-2 earnings statement.Immortal Coil
Those in estate-planning circles call Fontaine’s vehicle an incentive trust. Controversial because they seek to control beneficiaries’ lives from beyond the grave, incentive trusts lay out provisions that recipients must meet before receiving monetary distributions. Benefactors can design them to encourage anything from higher education and entrepreneurship to personal values such as charitable giving, employment or marriage among future generations. Grantors may also design them to discourage behaviors that they oppose, such as substance abuse or gambling, even obesity. Only imagination—and public policy—limit the options. (For example, a trust with incentives regarding marriage to someone of a certain race or faith would not likely hold up in court.) TOP VIEW
Incentive trusts contain provisions that beneficiaries must meet before they receive distributions. While some see them as attempts to control behavior from beyond the grave, they can be useful tools for communicating and instilling values, as long as they are well thought-out and flexible enough to stand the tests of time. |
Those who want to pull strings from behind the veil of tears should do so with caution. If not properly designed, incentive trusts can unfairly reward certain beneficiaries and punish others in a way that the grantor never intended, thereby fueling inequities and family resentments. “You cannot create character through a bribe,” says Michael Kavoukjian, a Miami-based partner with the law firm White & Case. “Trying to micromanage descendants’ lives from the grave, no matter how well intentioned, can have unforeseen consequences.” Fontaine’s trust is a good example. It overlooks eventualities such as the difference between a child who becomes an investment banker and another who becomes a missionary. The banker would receive large, taxable distributions he or she may not need, while the missionary—who clearly is engaged in a productive, meaningful life—will get very little from the trust, despite having greater need. An educational incentive, which is seemingly less problematic, also has drawbacks if, say, a beneficiary has a learning disability that keeps him or her from graduating from college.
Since incentive trusts are a fairly new estate planning concept, their long-term effect is unknown. They are unproven in a litigious sense because most, if not all, have not yet been implemented, says John Scroggin, an attorney and expert on incentive trusts with Scroggin & Co., a tax and estate planning firm in Roswell, Ga.
Because of their complexity, these vehicles are also more expensive to draft. Whereas the cost of a typical trust may range from $2,000 to $10,000, depending on the complexities involved, an incentive trust begins at the top end of that range and, depending on its scope, rises in cost from there.
|
