Article on Incentive Trusts
As the richest country in the world, the United States is home to a large amount of monetary wealth. Where will this money go when the current holders of wealth are gone? A new generation of “trust-fund” babies are closely following the extravagant lifestyles of Hollywood “celebutantes,” relying on inheritances or trust funds as their sole means of income. They are a generation of “give me’s”—trust fund babies—accustomed to getting what they want when they want it. This air of entitlement stems from never having to work a day in their life and knowing they never will. They live foolishly, extravagantly, and irresponsibly off the hard work of their parents and grandparents. This lackadaisical and lavish lifestyle potentially leads to a new generation of trust fund babies who fail to become productive members of American society.
Celebutante Paris Hilton, one-time heiress to the Hilton Hotel fortune, is an example of how a trust fund baby’s reckless actions can quickly make a large inheritance disappear. On Christmas Day in 2007, Hilton’s grandfather, Barron, announced plans to leave 97% of his wealth to the Conrad N. Hilton Foundation. Prior to this announcement, Paris was in line to inherit over $100 million. After her grandfather’s decision, Paris’ inheritance diminished to mere pocket change in comparison. “Jerry Oppenheimer, who profiled the Hilton family in House of Hilton (2006), says Barron Hilton was embarrassed by his granddaughter’s behavior and believes it has sullied the family name.” Barron Hilton’s extreme change in his estate plan occurred just a few months after his granddaughter’s short stay in the Century Regional Detention Facility in Lynwood, California. Paris’ jail stay was not the first time her bad behavior embarrassed her grandfather, and it has not been the last. Barron Hilton’s decision to give $2.4 billion of his estate to charity is one way—a drastic way—to use inheritances and estate plans to reign in unruly beneficiaries, whether to make an example of them or to deter bad behavior.
Barron Hilton is not the first billionaire to give away the majority of his estate to charity. In 2006, billionaire Warren Buffett also publicly announced his plan to give the entirety of his fortune to charity. Buffett does not believe large amounts of wealth should be allowed to pass to heirs unearned. In an interview, before announcing he was leaving all of his estate to charity, Buffet noted that “he want[ed] to give [his] kids just enough so that they could do anything, but not so much that they would feel like doing nothing.” It seems Buffett plans to leave behind a legacy stronger than wealth for his children and grandchildren, a legacy built on hard work and modest living.
This comment focuses on the use of incentive-based estate planning instruments—particularly trusts—as a way to curb the irresponsible and extravagant lifestyles many beneficiaries of large inheritances and trust funds exhibit. Part II focuses on the detrimental effects of failing to instill responsible money management skills and morals in beneficiaries before giving the beneficiaries access to a large amount of uninhibited wealth. Part III then discusses the basic elements of two different instruments that can be used as part of an incentive-based estate plan—conditional wills and trusts—and, which of these instruments is more beneficial to create an effective incentive-based plan. Part IV addresses the legal and public policy limitations on certain trust provisions, such as the cons of creating an incentive plan that is too inflexible and rigid, and ways to avoid these problems when creating the trust. Part V focuses on how to create an incentive-based trust and includes what purposes an incentive-based trust may be used for and what steps a settlor should take in the creation of a basic incentive-based trust. The comment concludes that incentive-based estate planning can be used to foster hard working, driven individuals out of entitled, spoiled, trust-fund babies.