Probate & Trust Law Section Conference Manual ... - Minnesota CLE

PLANNING AND DRAFTING FOR THE
USE OF INCENTIVE TRUSTS
P. Daniel Donohue
I. Introduction.
Public announcements by U.S. citizens in opposition to transfer tax
repeal have drawn attention to some estate planning trends. Wealthy individuals
no longer seem willing to focus solely 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 planning for clients with larger estates has traditionally
centered on those strategies that have been designed to reduce transfer taxes.
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
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