The “Trust Fund Baby” Antidote: Incentive Trusts
The “Trust Fund Baby” Antidote: Incentive Trusts
Wealth effectively acts as a sedative for ambition. How to structure trust distributions using the “Matching Principle” to ensure money rewards productivity, not laziness.
Executive Summary
- The Paradox of Plenty: Warren Buffett famously said, “Give them enough money to do anything, but not enough to do nothing.” Traditional trusts that pay a fixed monthly allowance often destroy a young heir’s drive to build a career.
- The Incentive Solution: An **Incentive Trust** conditions distributions on specific behaviors. The most powerful method is the **”Income Matching”** clause: The trust pays out $1 for every $1 the beneficiary earns from legitimate employment (W-2).
- Beyond Salary: Incentives can cover entrepreneurship (matching capital for a vetted business plan), education (bonuses for graduate degrees), or philanthropy (matching charitable donations). The goal is to align the trust’s money with the beneficiary’s growth.
The “Dead Hand” Risk
Micro-Management Fails: Don’t make the terms too rigid (e.g., “Only pay if they become a doctor or lawyer”). This creates resentment and forces children into careers they hate.
👉 The Fix: Use broad definitions of “Productive Member of Society.” Allow for low-paying but high-social-value jobs (e.g., Teachers, NGO workers) by using a “multiplier” (e.g., Match teacher’s salary 3:1).
Mechanic: The Matching Principle
Simulation: Two Heirs at Age 25 ($5M Trust Fund Each)
| Scenario | Standard Distribution (HEMS) | Incentive Distribution |
|---|---|---|
| Focus | Support & Maintenance | Reward & Behavior |
| Stay-at-Home Mom/Dad | Full Payout | “Phantom Salary” Match (Valued work) |
| Entrepreneurship | Trustee Discretion | Seed Funding (Milestone based) |
“Money creates options, but earned money creates character. An Incentive Trust ensures that your wealth enhances your children’s lives without depriving them of the joy of earning their own success.”