Incentive Trusts And Planning Across Generations (With Sample Provisions)

LAUREN J. WOLVEN is a Trusts & Estates Partner at Levenfeld Pearlstein, LLC

The information contained in this outline is for educational and instructional use only. No warranty, express or implied, is made as to their use. Any tax advice contained in this outline was      not intended or written by the author to be used and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. Before using any tax advice contained in this outline, a taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor

I. INTRODUCTION — BECAUSE MONEY DOESN’T COME WITH INSTRUCTIONS

In 1758, prior to the birth of our nation, Benjamin Franklin printed a short treatise entitled The Way to Wealth. One of the first, if not the first American book on personal finance, The Way to Wealth is the source of such famous aphorisms as “early to bed, and early to rise, makes a man healthy, wealthy and wise.” Franklin translated his work into a book of picture riddles for children entitled The Art of Making Money Plenty, believing that it was never too early to begin learning the concepts of financial management.

The fact that our founding fathers struggled with the challenges associated with transitioning wealth to the next generation, with which difficulties we still find ourselves wrangling today, is not necessarily a comforting realization. Unfortunately, there is no one answer or simple way to educate the next generation or one magic transfer technique that fits all occasions.

We still live in a world where the failure of wealth transfer gives rise to clichés such as “shirtsleeves to shirtsleeves in three generations.” The first generation creates the wealth. The second generation, often having experienced the struggles of their parents to earn and save, and generally under the watchful eye of the first generation, preserves the wealth. The third generation, having grown up knowing wealth and typically not having witnessed the obstacles overcome to create it, knows no better and dissipates the family wealth. The fourth generation is then left to start from scratch—from shirtsleeves to shirtsleeves. This dilemma is not just an American problem, however, as many cultures around the world have parallel metaphors.
The concept reflected by the shirtsleeve’s metaphor is not purely financial, however. John Adams is attributed widely with having said “I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce and agriculture in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.” With the change in financial fortune over the generations often comes a shifting of values, and Adams eloquently captured that sentiment.

There are numerous studies regarding family wealth transition that all reach the same conclusion: the senior generations, particularly the Baby Boomers, do not put enough thought and effort into planning for transition of wealth to succeeding generations. The reasons that individuals with wealth to pass on to their descendants fail to plan is unclear. Perhaps it is a discomfort with facing their own mortality, or perhaps they are frozen by paralysis of analysis when faced with difficult family dynamics? Regardless of the reasons behind the inaction, the result generally is not positive, either emotionally or financially.

In order to successfully tackle stumbling blocks that prevent successful wealth transfer, it is useful to understand the societal forces affecting and legal issues restricting transition of family assets and values. Most of the drafting techniques considered and issues discussed are relevant to estate planning in the 21st century, regardless of the testator’s net worth. Furthermore, the educational methods noted to help transmit values along with wealth are adaptable to varying net worth situations.