by Judy Barber
(originally published in Probate & Property, November/December 2007)

Conditional giving is one way to describe the type of incentive trusts that encourage future generations to conform to the values and expectations of the senior generation. Often in a first meeting with an estate planner, the client will talk about the importance of family values and a wish to impose a set of standards on succeeding generations regarding the transfer of assets and the use of income generated from those assets. This sense of stewardship often reflects a firmly held set of beliefs and a not fully conscious collection of historical experiences that have potential life-altering emotional as well as financial consequences for the beneficiaries. These strong emotions are often found just below the surface as the client expresses the personal meaning of the family’s accumulated wealth and a desire to convey that to the younger generation. Parents or grandparents may even want to define behavioral benchmarks such as which college members of the younger generation are expected to attend. The inheritance is conditional based on compliance, and loss of some or all access to the wealth is the consequence of noncompliance.

The estate planner will want to understand what motivates a client to use incentive trusts, as well as be aware of how his or her own family history and personal experience influence suggestions offered to the client. Communication skills are critical during the process of advising a client on the pros and cons of this emotionally charged estate planning tool. Consider the senior who feels a need to impose restraints on succeeding generations to mitigate destructive behavior such as drug and alcohol abuse or other mental health problems. Clashes may develop as the younger generation diverges from the perceived norm of the family, as when the definition of work ethic is not replicated from one generation to another.

A generation raised in an upper class environment with attendant educational, cultural, and material advantages may not have the same drive and ambition as the senior generation who grew up poor, with memories of not enough of anything. The work ethic of those parents, whether driven by passion or fear of poverty or some of both, created a level of responsibilities outside the family that perhaps meant less contact with their children, who may have preferred the parents’ presence to the wealth that was gained in their absence. This can lead successors to a different set of beliefs and a desire for another kind of lifestyle other than that of their hardworking father or mother. The dancer, high school coach, social worker, or stay-at-home dad may have less wealth to leave than an entrepreneur, but they may provide something the children value more. Yet it is often difficult for self-made clients to embrace the choices of the second or third generations who may place a different value on things than material wealth, in part because parents afforded them the luxury to do so! Parents may want to pass notions of frugality, hard work, and sacrifice to the next generation, which can be difficult to do in the midst of substantial affluence.

Types of Incentives

In Incentive Trusts: Considerations, Uses and Alternatives, ACTEC J. 6–11 (Summer 2003), Marjorie J. Stephens states that incentives are designed to “encourage perceived positive behavior and discourage perceived negative behaviors.” By developing specific language to be added to the trust, the expectation is that successors will conform to the outlined expectations. A partial list of defined types of incentives includes

• a lump sum received at college graduation, depending on the quality, expected academic rigor, and reputation of the college attended;
• a lump sum on completion of an advanced degree, with the amount dependent on the level of the degree and earning potential, for example, J.D.,M.D.,MBA, or Ph.D.;
• funding to match successor’s earned income;
• support for a stay-at-home mom but not for a working mom;
• denial of distributions to successors who do not complete a premarital agreement and/or a will;
• denial of distributions if a successor refuses to participate, for example, to attend four meetings a year regarding investments, partnerships, estate planning, and other business of the family;
• denial of distributions if a successor fails a drug test and/or refuses to commit to a regime of medical or psychological treatment, including hospitalization and medication; and
• denial or limited distributions because neither the successor nor spouse of the partner is employed and able to cover basic lifestyle expenses.

Pros and Cons of Incentives: Questions for the Client

• What perceived positive behaviors do you want to encourage? How might those be reflected in the estate plan?
• What perceived negative behaviors do you want to discourage in future generations? How might those be reflected in the estate plan?
• What effect might incentives have on your relationship with the next generation? How will you feel about that?
• How might incentives influence decisions over the lifetime of succeeding generations, 50 years from now? How do you feel about that?

Motivation to Control

“Control from the grave” is a cliché that is often attached to benefactors who want to extend their influence over succeeding generations. Where does the desire for control come from? Why do some clients resonate with the need for incentive trusts while others do not? The answers to these questions may be found in psychological concepts that spell out the importance of parental validation and the healthy emancipation of the younger generation.

The theory of self-psychology developed by Dr. Heinz Kohut (1913–81) provides possible ways of understanding this variation among clients. Lindzey Hall and John Campbell (Theories of Personalities (4th ed. 1998), at 181–82) state that it was Kohut who first identified the importance of empathy in the development of a robust self-concept. David W. Krueger (The Last Taboo: Money as a Symbol and Reality in Psychotherapy and Psychoanalysis (Brunner/Mazel 1986), at 24) suggests that parents have a difficult task: they need to provide a mirror of unconditional affirmation of the child’s experience from the child’s frame of reference through accurate empathy and they also need to represent reality accurately by setting appropriate limits. This is how the child begins to develop self-esteem.

Even adults appreciate affirmation that they are being understood. If the child’s needs are primarily seen in relationship to the parents’ needs, the potential to develop a strong and separate sense of self may be compromised. Under those circumstances, the child’s orientation remains focused first on the parents and later on others. Such children may grow up to disregard their own internal emotions, points of view, and feelings. Their focus is on approval from the outside. Parental approval may continue to be key to self-esteem, or the child may grow up in the shadow of a great-grandfather, spouse, peers, community members, or others whose approval and adulation are deemed necessary. Especially in American culture, success is defined by the accumulation of wealth and may be felt as a confirmation of worthiness. For some people, wealth represents their sense of value. Krueger asserts that this type of focus on externally driven goals, compulsion to work, and constant activity can mask underlying, perhaps unconscious, concerns about inadequacy, insecurity, guilt, and worthlessness.

Kohut’s theory of self-psychology is not an all-or-nothing set of concepts. The development of self-esteem and self-reliance occurs on a continuum from limited self-esteem and autonomy to a strong sense of self and independence. Rarely does a child grow up with parents who always reflect understanding and unfailingly meet the child’s needs. Some children, by nature, may need more or less boosting, balancing the need for unconditional love with appropriate limit setting.

Few parents provide a pure and consistent model. Those who look at their children as primarily a reflection of themselves often had parents who wanted to see themselves in their offspring and who feel disappointed when their children’s needs, desires, and beliefs turn out to be different from their own.

Significant wealth may afford the parent who does not see enough of herself in her children the ability to influence the successor generation through the purse strings. In many cases, this stance is not a reflection of spitefulness but rather an inability to understand the needs of members of the next generation to develop independent identities.

Professionals might be struck by the stories of what clients have endured in childhood and how hard they have worked for their success. Sometimes the whole story is delivered all at once; other times the pieces come together over years of snippets, shared during the process of planning their wills and trusts. Any number of social, psychological, or personal forces may have contributed to the client’s belief that future generations must adhere to a certain set of values and model their lives after those who created the wealth.

Case Study

Ted, the son of immigrant parents, amassed a fortune in oil and real estate. All his life he was able to “smell” where the oil was and see a new community of tract houses rise up out of a dusty desert. From the time he was 10, he knew he wanted more than his parents’ life. His father thought he was foolish to be so serious about his grades, after-school sports, and a college education, and never attended Ted’s high school football games or watched a swim meet. His father’s response to his achievements was either cold silence or mean-spirited ridicule.

One evening, the summer before Ted left for college, his father sat at the dinner table heckling Ted about his “namby-pamby” indoor job at an oil company in town. At that moment, Ted realized he had to leave home. His mother stood helpless in the doorway of his bedroom as Ted packed his bags. He moved in with his best friend’s family until he left for college. Ted’s father refused to attend his son’s graduation then died a few weeks before Ted’s 30th birthday. In spite of huge financial success, Ted carries this childhood legacy with him. Neither of his parents, his mother filled with fear, his father full of rage, could reflect his wishes nor confirm his ambitions.

Ironically, Ted expects his own children to be just like him. He believes he knows what is best and is puzzled and disappointed that Anne, age 40, and Gary, age 38, are not working as hard in the family business as he always has. Each receives a salary of nearly $200,000 a year, plus distributions from interests in lucrative partnerships. At age 67, Ted now knows that Gary will not succeed him in the business. He has fought with his son over the years because Gary has ideas that do not fit with what Ted believes to be successful business practices. The arguments have deeply hurt Gary as they always end with, “Kid, you don’t have what it takes to run this company.” Gary feels numb and philosophical. “Dad wants to look at me and see more of himself.” Gary admits he is coasting and spends a lot of time with his family, attends his children’s school and athletic activities, and plays a lot of golf. He does what his father tells him to do at work and puts in about 30 hours a week. He had big dreams of succeeding his father after receiving his MBA and working in a national real estate firm for a couple of years. But after 10 years, he’s given up trying to please this father, who resists Gary’s attempts to modernize business systems and professionalize the staff.

Gary’s sister Anne is married and happy without children. She manages all the commercial properties, along with a staff of six people. She spends a lot of time with her mother, Jane. “I work hard and I’m tired of battling Dad as he continues to micro-manage me, even though I have few vacancies and do a great job maintaining the buildings for a minimum of expense.” She’s thinking about starting her own business, and her husband is successful in his own right and a keen investor. When she informed her father that she wanted a replacement for her position by the end of the year, Ted’s response was, “Good luck! You’ll be back. You cannot make it on your own.”

Ted wants to make sure his grandchildren and future generations do not turn out like his children, who do not appear to mirror his values. In his hurt and disappointment that they refuse to see things his way, he seeks the advice of an estate planner to ensure that any future generations will be required to meet his standards of hard work and productivity.

Like other creators of wealth, Ted may be unaware of the internal forces that are the basis of his disappointment and his need for control. He is unable to see future generations in any way beyond extensions of himself. He cannot accept that his children have become independent adults with lives of their own.

Clients will fall somewhere along a continuum between wanting their children to be reflections of themselves and allowing them to exercise their freedom to be independent adults. Three factors may motivate clients to feel the way that Ted feels.

1. Independent children may come to mean that the relationship is conducted at a distance. As adult successors make their own choices about lifestyle, they may have less in common with their parents.
2. The client does not welcome changes in the world or believes that there is no need to adapt to shifting cultural-business practices.
3. The client feels embarrassed by his children’s choices and the lives they are leading.

Asking questions designed to illuminate the client’s history, motives, and goals provides important data about how the client values his successors’ autonomy and clarifies the motivation for conditional giving:

Are you concerned that with greater independence, members of the next generation will literally move away, or otherwise distance themselves emotionally from you?

In Ted’s case study, his son Gary is not passionately engaged in the business and his daughter Anne wants to leave the job that he has provided for her. If they assert themselves, what will they talk about at the family dinner table? The business has always been the connective center of the family’s life, so what will the three of them have in common? Ted fears he may lose influence, his children may have less contact with him, and he may have no one to talk to about what is important to him.

Do you anticipate change and see the need for change? Can you imagine how society may be different two or three generations down the line? How might those changes influence your thinking about incentive trusts that distribute wealth over many generations?

Ted does not understand computers and likes the family feeling among employees. He disapproves of what he perceives to be Gary’s lack of drive and Anne’s selfish decision not to have children. He does not understand the range of acceptable lifestyle options for his heirs in a world of new rules and personal choices. He refuses to believe the world is “that different from when I grew up.” It is hard to imagine the extent of how much it will change several generations into the future, yet the desire to control is strong.

Do you feel embarrassed when you look at your children and fail to see a reflection of yourself? Is it hard that your children do not fit into your definition of success? Is it uncomfortable to talk about them with your peers?

That he cannot proudly say with certainty that Gary will succeed him in the business is hard for Ted. And when his friends ask him why Anne does not have children of her own, he is compelled to shrug and say, “She wants to travel.”

Pros and Cons of Tying Economic Welfare to Incentives

The attorney’s task is to implement the needs and desires of his or her clients. The senior generation has the right to pass on an explicit philosophy that reflects a standard for the succeeding generations to follow in order to enjoy the benefits of the family’s wealth. Incentive trusts represent the statement: “This is what I value and I want to ensure my legacy is not wasted through the irresponsible spending of my hard-earned resources. ”Accountability to the legacy of the senior generation may provide peace of mind in spite of the personal and financial complexity that incentive trusts bring to the next generation. It is also important that the client be alerted to the potential consequences of conditional giving by hearing the attorney’s professional and life experiences.

If income is going to be based on conforming to standards set by a previous generation, it is safe to assume that some successors will conform and some will not. Leaving out “special needs” issues, it is still a challenge for the creators of a dynasty trust that extends several generations into the future to address the potential range of intellectual, emotional, and social skills of those to come.

Polarization will surely occur between those who conform and those who do not conform to behavioral standards set by incentive trusts. Competition may breed animosity and distrust.

How might unequal distributions affect family relationships in future generations? Does that concern you?

Those who meet the standards may well become co-trustees and/or board members representing their generation and perhaps influencing how assets are managed, including the power to revise investment policy or change the direction of an operating business.

Will those who have succeeded in meeting behavior standards influence distributions made to siblings and cousins?

If so, will they be trained to look after the interests of all members of their generation, even those who have not met the conditional terms of the dynasty trust and therefore have less access to the wealth?

Competition, envy, and resentment may pass from one generation to the next. Estate planners may suggest governance structures that provide each generation with a level of autonomy that avoids some of the toll on the family caused by unequal distributions.

Influence of the Attorney’s Own Background

Estate planning attorneys will want to deepen understanding of their own personal history and enhance sensitivity to emotional hot buttons around questions that come up in handling incentive trusts. As the client struggles with decision making, consider any personal, unspoken biases by thinking through the following questions:

• How many members of your family have been lawyers? Is there a professional precedent for lawyers in your family? If so, did that influence your decision to become a lawyer?
• Have certain events, perhaps reaching generations back, limited the view of possible career or lifestyle choices in your family?
• Have you ever experienced conditional giving as the giver or receiver? What was the take-away from that experience?
• How might your own experiences influence the incentive-based estate planning decisions clients make?

Conclusion

An attorney’s own sense of both the breadth and the limits of what feels appropriate to address is key to open discussion with clients. Guidance about what is comfortable to discuss will be apparent when the client answers the questions regarding concerns that the succeeding generation’s greater independence may create distance between generations. Elders may find difficulty in seeing the potential for change and disappointment and embarrassment that children do not reflect their values. The planner will need to provide guidance about what is comfortable to discuss.

An incentive trust is a psychologically complicated estate planning tool. Many Teds of the world see the use of standards of behavior as a worthwhile plan to perpetuate what they believe is right. The attorney can help the client balance conflicting pulls and make fully informed choices. On the one hand, incentives have the potential to make future generations strong stewards of the client’s hard-earned wealth. On the other hand, incentives can polarize succeeding generations and create family strife. The estate planner and the client should discuss the full meaning of conditional giving and understand the range of possible consequences. Estate planners and clients, in the course of dialog, it is hoped, will become aware of the effects of their individual family histories and experiences, and the psychological implications will be incorporated into the ongoing debate about the pros and cons of incentive trusts.