In our continuing series we have looked at mechanisms that can be employed in estate planning documents that build human and cultural capital in the family. These structural designs contain a series of elements or “components”.
Many traditional estate plans do not have a level of accountability built into the documents. Principal is either sitting in the trust and generates income, or it is being distributed outright without strings. This binary approach to distributions often fosters passivity on the part of beneficiaries. This passivity can be deadly to personal initiative and often erodes both personal effectiveness and inner capacities. Often people attempt to deal with this by creating “incentive” trusts – but these tend to be clunky and mechanistic and lack the flexibility necessary to truly shape the human and cultural capital of the family.
One way out of binary or formulaic approaches is the creation of a structure that includes notions of borrowing and repayment. Using a trust that requires an application process can create a degree of accountability not found in traditional or incentive trusts. These kinds of entities function much like a family bank. Family members must apply to the trustee or a panel of family members in order to obtain a distribution. In their application, they must demonstrate how the distribution they are seeking is an investment in their human, social, or cultural capital. For example, a person might apply for tuition on the grounds that this will be an investment in their human capital. The applicants would be required to show what outcomes they expect, what benchmarks will be required of them and how the investment of family resources will enhance the overall well-being of the family. Oftentimes these take the form of actual applications with defined questions. For example, an educational loan might require that the student complete their schooling by a certain date and with a certain GPA. In cases of investment in family business ventures, the family bank can become an equity stakeholder and thereby participate in the upside of the business. Structures with repayment obligations can be ideal for helping family members get advanced degrees, start new businesses, initiate charitable endeavors, undergo therapy, purchase real property, get married, and so on.
The requirement that funds must be wisely used and not squandered and that there is an obligation running back to the family for the benefits received from the family can do a great deal to reduce the sense of entitlement that many heirs of traditional estate plans exhibit.
Questions
- Have you had climbed to a set of family banks? Has the experience been positive or negative?
- If it was positive, what made it so? If negative, what went wrong?