Incentivizing Inheritances

Every successful manager in the business world knows that money can help get things done: end-of-year bonuses can cheer the disgruntled, and targeted cash rewards can help direct effort to where it is most needed. Decisions on what to do about money at the end of a successful career are harder. When writing a will, how do you leave children money in a way that encourages them to work hard?

The number of parents facing this dilemma is growing. After falling between 1930 and 1980, the concentration of wealth at the top has been steadily rising. The research shows that by 2012, the richest 1.6 million families in the U.S. were worth $14 million on average. The baby-boom generation is projected to pass on $59 trillion – the biggest wealth transfer of all time. Getting an inheritance right is becoming more important.

Over the years, some of America’s top tycoons have cut their children out altogether, adopting the philosophy that large sums of money work more for injury than good. Warren Buffet is set on giving away 99% of his wealth so that his heirs have “enough to do anything but not enough to do nothing.” The fear is that too much too young leads to idleness.

Some say that varying the levels of inheritance promised to children is a good way to force them to take the parent’s wishes seriously. The use of “incentive trusts” has increased in the past 20 years. Parents tend to include three types of clauses. The first encourages educational success by tying payouts or bonuses to achieving an undergraduate degree. The second incentivizes hard work after graduation by making payouts that matches an heir’s salary or rewards the creation of a new business. The third includes good-behavior clauses that link cash returns to things like religious adherence or abstinence from alcohol.

The evidence on incentive trusts is mixed. Many say that when carefully designed they work well. But they can generate perverse incentives. An education clause can penalize heirs who drop out of college due to ill health. And income-matching favors high-paying jobs over socially useful ones — parents might be indirectly punishing children for choosing teaching or missionary work over banking. There are ways around this, including trusts that give a bigger income-match for worthy work. The objective is to be thoughtful and intentional in decision-making. Whatever the strategy, the upcoming years will see an increase in incentivizing inheritances.

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Written by Legacy Planning Law Group

Legacy Planning Law Group is dedicated to working with individuals and families to help protect the assets they have built throughout their life, and make everything simpler for families who have lost a loved one. We help thoughtful people achieve the peace of mind that comes with planning their personal legacy and passing on family harmony.