TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, January 31, 2006

NY Times on Incentive Trusts

Interesting article in the New York Times, In Some Trusts, the Heirs Must Work for the Money, by Catherine M. Allchin:

In traditional trusts, beneficiaries receive money at a certain age, but in incentive trusts, heirs must reach milestones or take actions. For example, children might receive a $25,000 bonus when they graduate from college or marry. Or they might receive funds matching money they earn....

Money "is a two-edged sword," said George S. Holzapfel, an estate planning lawyer at Lasher Holzapfel Sperry & Ebberson in Seattle. "We've seen children get large sums of money before they're ready, and it can ruin their lives." Mr. Holzapfel recommends this type of trust to his affluent clients with young children. Many people want an incentive trust, he said, "so that if they happen to die early, their kids can still develop a strong work ethic and a good sense of values." Mr. Holzapfel, who has many wealthy clients in the technology and real estate fields, says he has seen a growing interest in performance-based trusts....

Critics, however, call incentive trusts too inflexible and say that some parents can be too controlling. A trust that offers a dollar for every dollar earned can be unfair, the critics say, because it gives big rewards to already-successful business people and much smaller amounts to heirs who may work just as hard but have chosen careers as, say, artists or teachers. (And unless other provisions are made in the trust, homemakers and volunteers may get nothing.) Critics also say that some incentives may go so far as to pay children to provide their parents with grandchildren.

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