This essay is based on a panel discussion at the 2016 South Dakota Law Review Symposium: Asset Protection and Trust Innovations: South Dakota's Role in Paving the Way for Innovations Nationwide. The largest transfer of wealth in United States ' history will occur over the next thirty years as the aging baby boomers prepare to transfer an estimated $30 trillion. A desire to balance privilege and personal responsibility is reflected in this generation's aversion to "trustafarians" and the seeming popularity of incentive trust provisions. Incentive trusts incorporate financial incentives and disincentives designed to encourage the positive behavior of a beneficiary'. The purpose of this discussion is to explore the idea of incorporating learning outcomes into the drafting of incentive trusts when the incentive provision requires that the beneficiary develop a skillset as opposed to merely completing a binary task. In the context of legal education, law schools are moving away from focusing on the ability of the student to complete a particular course and are focusing instead on the broader outcome: a graduate's ability to demonstrate knowledge and understanding of the law' such that the graduate can deliver legal services of a high quality. By incorporating a clearly articulated objective in an incentive trust when the grantor wishes for the beneficiary to develop a skillset, the beneficiary may be moved towards an intentional paradigm of learning. By way of example, the proposed approach will be framed within the context of a laudable proposed goal: creditworthiness of the beneficiary.
INTRODUCTION: "SHIRT SLEEVES TO SHIRT SLEEVES IN THREE GENERATIONS." (1)
The largest transfer of wealth in United States' history will occur over the next thirty years as the aging baby boomers prepare to transfer an estimated $30 trillion. (2) A desire to balance privilege and personal responsibility is reflected in this generation's aversion to "trustafarians." (3) And for those clients with multigenerational wealth, the issue of third generation destruction of wealth has become a particularly relevant topic. These clients seek to avoid destruction of wealth that is almost inevitable despite the best efforts of financial and estate planners--with almost 70% of family wealth lost by the second generation, and more than 90% destroyed by the third generation. (4)
The almost-foolproof solution is to circumvent the next generations entirely, leaving one's fortune mostly or wholly to charity. For obvious reasons, this does not accord with the desires of most settlors. An alternative is to pass one's fortune to the natural object of bounty with strings attached--or conditions designed to encourage positive behavior--through use of an incentive trust. Incentive trusts condition receipt of inheritance upon more than simply attainment of age, using specific trust provisions that either mandate or prohibit behaviors as a condition of distribution. (5) Such provisions may, for example, require that the beneficiary graduate from college or marry prior to receiving a distribution of interest or principal. Conversely, incentive trust provisions may also prohibit behavior deemed undesirable, such as the abuse of alcohol, use of illegal drugs, or excessive gambling.
As a law professor, it is unsurprising that I embrace the idea that education serves as a panacea for many ills. It is worthy of note, however, that wealth management firms and estate planners have also embraced this idea that family education--focused upon such topics as the fundamentals of budgeting, investing, and about the responsibilities of multigenerational wealth--may go far to prevent third generation destruction of wealth. (6)
Understanding that education may well be "[t]he most successful estate-planning tool" in terms of protecting wealth, (7) the purpose of this essay is to explore the idea of incorporating outcome-based learning approaches into the drafting of incentive trusts. In the context of legal education, law schools are moving away from focusing on the ability of the student to complete a particular course and instead are focusing on the broader outcome: "graduates' ability to demonstrate both their 'knowledge and understanding of law ... [such that each graduate can] deliver legal services to a high quality.'" (8) By incorporating outcome-based learning approaches in an incentive trust when the settlor wishes for the beneficiary to develop a skillset, as opposed to merely complete a task, the beneficiary may be moved towards an intentional paradigm of learning. (9) Further, a trustee may develop strategies to cultivate this learning, as well as seize upon teaching opportunities to help the beneficiary.
Cognitive psychology suggests that metacognition--or a broader awareness of what one is trying to accomplish--facilitates more effective learning. (10) A parallel approach to that being taken in higher education may be used to rethink the estate planning approach to drafting incentive trust provisions that focus on development of a skillset. By clearly identifying and articulating learning objectives (as defined by the settlor), the goal is to move the beneficiary towards developing the desired skillset. Such an approach would provide a framework within which the estate planner would meet with the settlor to: (a) identify and articulate measurable learning objectives; (b) design an approach that will allow the beneficiary achieve learning objectives within a defined period of time; (c) require trustee feedback as to the beneficiary's progress towards the defined objectives; and (d) establish criteria that will establish the beneficiary's success in reaching the articulated learning objectives. (11)
FRAMING AN EXAMPLE: CREDITWORTHINESS AS A DEFINED OBJECTIVE
Money may provide a safety net that buys a trust beneficiary freedom from stress and worry, but without an understanding of the rules of personal finance--such as budgeting and saving--even the largest trust can be swiftly depleted. (12) While many estate planners consider some incentive trust provisions...