Indonesian families: inspiring the next generation through an Incentive Trust

In today’s fast-evolving world, successful Indonesian families face more than just the challenge of preserving their wealth; they also need to inspire their Generation Z heirs to act with purpose and become effective innovators and leaders.

For high-net-worth individuals who want to protect their wealth across generations but also want to ensure it doesn’t negate the work ethic and values that they are trying to instil in their children, an ‘Incentive Trust’ established in a tax neutral overseas jurisdiction with a trusted legal and regulatory framework may be the estate planning tool to consider.

Many people seek to order their affairs by making a will, but the probate process can result in lengthy delays, high administration costs and often tax liabilities. Many people do not want their assets to pass outright to their heirs, whether chosen by them or as prescribed under forced heirship rules, and prefer to make more nuanced arrangements.

The best alternative to a will is to set up a trust during lifetime. A trust is probably the most flexible way of making arrangements of this kind and an Incentive Trust provides a real opportunity to use the trust structure to control the disposition of assets to future generations by instilling responsibility, encouraging ambition and rewarding achievement.

Beyond preservation: trusts as a legacy of values
Traditionally, trusts have been regarded to safeguard assets from potential threats – from third parties such as potential creditors or a spouse in a divorce – as well as directing how they are to be used after they have been transferred into trust.

A well-constructed trust can place the right money, in the right hands, at the right time. It offers the flexibility, creativity and control that a will cannot. It allows the settlor to organise their wealth to ensure that they can maximise its effectiveness during their lifetime and beyond.

But for forward-thinking Indonesian families, an Incentive Trust can serve a higher purpose: passing on meaning and not just money.
As with all trusts, Incentive Trusts are legal structures that hold and manage assets for the settlor and their beneficiaries, but with specific requirements for how and when money can be disbursed. They can therefore provide innovative strategies for distributing wealth in line with the settlor’s values, so that beneficiaries can be motivated to achieve beyond their trust pay-outs.

The settlor can specify almost any rules they want, reflecting their desire for their beneficiaries to seek higher education, gainful employment, further charitable causes and live responsibly. They could stipulate a pay-out when a beneficiary graduates, marries, has children, reaches a certain age or sets up a business.

Equally, the heirs of HNWIs have the private resources to do good work or pursue careers that are not necessarily lucrative. The utility and success of Incentive Trusts depend on how they are drafted and family circumstances. They should be written with a degree of flexibility to accommodate changing situations and unintended consequences.

Uses of Incentive Trusts

• • Encourage entrepreneurial spirit
    Members of Gen Z – loosely, people born from 1995 to 2010 – are true digital natives. According to Stanford’s Centre for Advanced Study in the Behavioural Sciences (CASBS), they are typically self-driven, collaborative and diverse-minded.Contrary to stereotypes of being ‘lazy’, Gen Z is entrepreneurial and adaptive. This presents an opportunity for intergenerational collaboration to foster mutual understanding to bridge the gap between traditional norms and modern approaches.An Incentive Trust could:
    • Provide seed capital for business or social enterprise ventures accompanied by a valid business plan.
    • Include incentive clauses that match funding with milestones or impact.
    • Appoint mentors or advisory boards to support young entrepreneurs.
    • Avoid the entitlement trap by linking distributions to contribution or merit.

      Example: A trust could allocate USD500,000 for a grandchild’s start-up, but only after they provide a business plan and find an external co-investor, ensuring commitment and validation.

  • Education with a purpose
    To encourage a beneficiary to get the best out of their education, an Incentive Trust can go beyond paying for tuition, materials, living and rent expenses by:
    • Funding global internships or research projects aligned with family values.
    • Offer experiential education, such as cultural exchanges or volunteering.
    • Encourage intergenerational mentoring, where Gen Z heirs learn directly from elders or family council members.

      Structured correctly, this creates not just career readiness, but character development.

  • Embedding a ‘family ethos’ through the Trust
    Settlors can integrate letters of wishes, family charters and governance principles into the Incentive Trust structure, which will help to convey:
    • The family’s origin story and purpose.
    • Core values such as philanthropy, humility and resilience.
    • Rules around roles, responsibilities and family involvement in business.This turns the trust into a living legacy with a framework for building strong, independent successors.
  • Encouraging Social Responsibility
    A growing number of families are using trusts to support causes that matter to their beneficiaries by including:
    • Philanthropic provisions or dedicated sub-funds.
    • Impact committees to oversee Environmental, Social and Governance (ESG) or charity investments.
    • Trustees can distribute based on measurable social outcomes, not just financial needs.This can give heirs a sense of agency, purpose and pride because they are rooted in a larger legacy.

  Choosing the right trust location
  As Indonesian families become more international – with children studying in London, running businesses in Singapore or volunteering in Africa – an overseas (offshore) trust can offer important stability and flexibility to their planning by facilitating:

  • The multi-jurisdictional holding of assets (real estate, shares, IP).
  • The ability to fund initiatives without probate delays or currency constraints.
  • Alignment with local and international tax compliance standards, such as the OECD Common Reporting Standard (CRS).

  “Due to Indonesia’s civil law system, the concept of trusts was initially unfamiliar, particularly concerning aspects like beneficial ownership, the transfer of benefits and related taxation issues,” said Brilianto Hadi, partner in the Jakarta office of GHP Law Firm.

  “However, increasing investment from common law countries such as Singapore, the UK, Hong Kong and the US, as well as investment from civil law countries that recognise the concept of trusts, like Japan, has increased familiarity with trust structures in Indonesia.

  “While Indonesian law has provided a general trust framework supervised by the Financial Services Authority (OJK) since 2023, the creation of Indonesian trusts is pending the issuance of implementing regulations. Therefore, the need for Indonesians to utilise foreign jurisdiction trusts remains,” he added.

  There are a number of different countries worldwide that have enacted trust legislation, but the quality and suitability of that legislation can vary. When selecting the best jurisdiction for establishing a trust it is important that it should offer:

  • A strong tradition of enforcing trusts.
  • An English common law system.
  • An established reputation for trust business.
  • Modern legislation, including contemporary trust concepts.
  • Low or no taxation for trusts.

  Choosing the right trustee
  An individual or firm entrusted with the duty of managing assets placed in trust is a trustee. Choosing the right trustee(s) is a crucial part of setting up a trust because trust law imposes strict obligations and rules on trustees.

  A trustee must follow the trust deed and is subject to very strict rules governing the way in which their powers and discretion may be exercised. Trustees must always exercise their powers in the best interests of the beneficiaries of the trust and must act prudently in the management of trust property.

  Corporate trustees that are appropriately licensed, like Sovereign, are held to a standard of providing responsible ethical conduct, careful exercise of discretionary powers, competent investment management, expertise in tax and legal matters, and continuity in the administration of the trust for its duration.

  Sovereign is fully licensed to act as professional trustee in both Singapore and Hong Kong, which are both conveniently located for Indonesia, but also in the leading European trust jurisdictions of Guernsey, the Isle of Man, Gibraltar, Malta and Cyprus.
  From wealth to wisdom

  Indonesian families have long succeeded through vision and tenacity, but as wealth transfers from the original founders to their heirs, the greatest risk is not losing money but losing motivation. By leveraging a trust for incentive-driven empowerment, families can ensure their legacy is not only sustained, but expanded by the next generation.