On June 11, 2013, Davenport Evans attorney P. Daniel Donohue presented “Planning and Drafting for the Use of Incentive Trusts” at the Minnesota State Bar Association’s 39th Annual Probate and Trust Law Section Conference in St. Paul. Incentive trusts, a trending request among clients today, forego traditional asset transfer strategies in favor of provisions that encourage beneficiaries’ good behavior such as education, philanthropy, and productivity, while discouraging inappropriate behavior, such as substance abuse and overspending. Donohue discussed possible beneficiaries, types of behavior that could be addressed, and incentive trust planning techniques, and offered sample provisions.
In this presentation excerpt, Donohue explains the incentive trust trend:
Estate planning for clients with larger estates has typically centered on traditional strategies designed to transfer assets to or for the benefit of a spouse and then ultimately to descendants or other family members. Estate planners and advisors have assumed that a client’s primary goal would be to minimize the amount of transfer taxes in order to maximize the amounts available to family members and more remote descendants. It now appears that some clients have determined that transfers of valuable assets, whether outright or in trust, could ultimately be detrimental to succeeding generations. Public statements by members of the Buffet and Gates families underscore the fact that wealthy clients may desire to use their estate plans to both encourage appropriate behavior and, at the same time, discourage inappropriate behavior by beneficiaries. In addition, many clients have certain beneficiaries with specific needs that may be addressed through unconventional estate planning.
There seems to be a greater interest from our clients with regard to the use of incentive trusts. Clients also appear to be allocating a much larger share of their assets to non-profit entities and charitable trusts. Clients are also establishing private foundations or donor-advised funds with their local community foundations. These trends suggest that our clients are truly becoming more concerned about the effect that accumulated wealth will have on their descendants. Some primary concerns would appear to be in the areas of motivation, personal self-sufficiency, self-esteem, productivity, and addictive behavior. At the same time clients have a natural desire to provide resources to their descendants to assist them with financial support for education, health care, financial training, family support, and business ventures.
It is unlikely that the federal transfer tax system will be abolished. After years of uncertainty, the federal estate and gift exemption has been set at $5 million plus adjustments for inflation. In addition to the tremendous interest in dynasty trusts that can be extended beyond the typical perpetuities period, the $5 million exemption gives planners and their clients more latitude for generational incentive trust planning than previously offered when the exemption was lower. It may be more important for estate planners to focus attention on drafting those types of incentive provisions that will influence the behavior of trust beneficiaries.
Donohue’s practice involves estate planning with an emphasis on trust administration. He is a Fellow of the American College of Trust and Estate Counsel, currently serving on the College’s Board of Regents, and the American College of Real Estate Lawyers. He also serves as a member of the South Dakota Governor’s Task Force on Trust Administration Review and Reform.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.DEHS.com or call 605-336-2880.