As executives plan for their retirements and ways to secure their families’ futures, they have traditionally set up wills and trusts to pass along wealth to their children and to mitigate tax consequences.
These types of estate-planning documents can provide peace of mind for executives, along with financial security.
A relatively new way to pass along a sense of ethics and values that helped to create the family wealth is the Family Incentive Trust (FIT). The FIT provides more than just a vehicle to distribute assets; it establishes a framework that correlates to the beliefs of the grantor and helps reduce the worry that heirs will make errors or life choices that are not reversible.
Executives and CEOs who have worked hard and put a great deal of effort into building their wealth don’t want a child to become a less-than-productive member of society because of a significant inheritance, says Kerry-Michael Finn, vice president of financial planning for the Western Market of Comerica Bank.
Smart Business spoke with Finn about how FITs can help high-net-worth individuals assure the future for their families.
What is an FIT?
An FIT is a trust that passes along assets to the next generation, while trying to minimize potential negative effects. For example, the trust may specify that the inheritance be passed along through income matching or it can be distributed based upon clauses that require the heirs to achieve specific education levels or contribute community service time.
Income matching can be very valuable, because it may allow an heir to pursue a career in teaching or philanthropy that might not otherwise be an affordable option. It is also possible to tie monetary rewards to other achievements, such as refraining from drug or alcohol abuse or raising a family. Monetary awards can also provide the capital to make a down payment on a home or start a business.
How can CEOs benefit from having an FIT?
If the family business is privately held, it may be possible to pass along the ownership through the trust and preserve the same values that built the business. Even if the wealth has been built through a career in public companies, the concept of transferring values as well as cash can still be achieved.
How can I make certain that an FIT is a positive motivation for my heirs?
This can be accomplished by making certain that the document is flexible enough to accommodate a variety of circumstances while allowing each heir to become successful in his or her own way. For example, placing a requirement of obtaining a four-year university degree might not be achievable for everyone, but receiving a certificate through a trade or technical college as a substitute might be the type of incentive that will transfer the value without placing an unreasonable restriction on the heir.
If I currently have an existing trust, can it be amended to include an FIT?
In some cases, yes. Incentive language can be added or incorporated into an existing trust document. It may be best to review the existing trust as some tax laws may have changed since it was originally drafted, so it might be more efficient to draft a new document.
What measures can I take to make certain the FIT is flexible enough to handle unforeseen circumstances?
When an FIT is created as an irrevocable trust, it has a safety net built in, because the assets in the trust are not considered as assets of the beneficiary and generally cannot be attached by creditors or subject to division through a divorce decree.
The standard provisions of an FIT allow for additional distributions based upon the need for health, education or maintenance and support by the heirs. In addition, the FIT allows for additional distributions at the discretion of the trustee.
I normally recommend that the trustee be a family friend, attorney or accountant along with an institution. In these cases, having a family friend and an institution serving as co-trustees can be beneficial, because the institution will outlive the individual trustee. It is always good to start the process well in advance, so that the staff at the institution can get to know you and your values and thus make decisions and interpretations that they believe are in line with your core beliefs. I also recommend that grantors draft a letter or statement that very specifically states their beliefs and wishes for this trust.
KERRY-MICHAEL FINN is vice president of financial planning for Comerica Bank. Reach him at email@example.com or (714) 424-3823.