Chapter 8
Trustees and Beneficiaries

Human Consequences

Around the world, in any community shaped by English common law, trusts play a central role in many families’ wealth. The reasons that family members establish trusts usually include:

  • Tax minimization: putting family assets outside the reach of taxing authorities, with a view to both income taxes and to transfer taxes (i.e., estate, gift, and generation-skipping taxes).
  • Asset protection: increasing the likelihood that beneficiaries’ creditors or disgruntled former spouses will not be able to lay hands on family assets.
  • Control: putting a representative of the founder in control of a founder-led enterprise and/or making sure that beneficiaries access family funds for the reasons, at the times, in the manners, and in the amounts that the trust creator deems best.

There is nothing inherently wrong with any of these motivations. But in years of advising trust creators fired with the dream of establishing trusts that would stand the test of generations, as well as consulting with beneficiaries who found themselves caught in the Black Hole of those dreams, we have seen some general trends:

  • Generally, people find trusts to be confusing and opaque.
  • The reasons for setting up trusts often ensures that by the third generation of a family’s life over 90 percent of its assets have been carried into trust by a “trust wave.”
  • The confusing and complex nature of trusts—along with the customary silence about anything to do with money—ends up causing over 80 percent of beneficiaries to feel that their trusts are a burden, not a blessing.
  • The combination of the trust wave and this feeling of burdensomeness accelerates families’ entropy, dissolving their human and financial capital with great speed.

As a result, in too many cases, what starts as a way to preserve family wealth ends up too often becoming a primary source of wealth dissolution.

The factors behind this decline are emotional and relational, not legal or financial. The response must be similar. Whether you have established many trusts already, or you are considering setting up trusts for the first time, we encourage you to begin that response by considering these three questions:

  1. How can your beneficiaries come to see their trusts as blessings rather than burdens?
  2. How all the people who live with your trusts make sure that these trusts embody primarily human relationships and, only afterward, legal relationships?
  3. If your trustee had to terminate a trust tomorrow and distribute its assets, how could both the trustee and the beneficiary feel more secure that the beneficiary could successfully integrate those assets into his or her life?

These questions focus the attention of trustees and beneficiaries on improving the human consequences of the trust. In what follows we will summarize a few of the recommendations we offer to reach that goal.

Vocabulary

If we are going to change the way we think and act about trusts, we first need to understand how we think about them.

Our thoughts about trusts or anything else usually take the form of narratives, a collection of beliefs, assumptions, or stories. The fear of “trust-fund babies” might be part of your narrative. So, too, might be the perception that trusts equal mistrust. Alternatively, if you’ve had a friend whose trust helped protect his assets during a tough time, that would be a positive part of your narratives around trusts.

To evaluate your narratives, ask yourself these questions. What are your narratives about:

  • Trusts?
  • Trustees?
  • Beneficiaries?
  • Giving?
  • Receiving?

Once you’re clearer about your narratives, you can begin to change the way you speak about trusts.

To that end, ask yourself what you think a trust primarily is. Is it a document? A legal structure? A receptacle to hold assets? A tax strategy? Or a meaningful relationship?

Unsurprisingly, when we ask groups of wealth-holders this question, almost 90 percent of audience members choose one of those first four answers. Only about 10 percent say that a trust is primarily a meaningful relationship. And yet, both in law and in practice, that is what a trust is: a relationship among grantor (the person who sets up the trust), the trustee (the legal owner of the trust assets), and the beneficiary (who derives some sort of benefit from the trust assets). Documents, accounts, tax savings, and so on are all secondary to that relationship.

To highlight the relationships involved, we encourage you to think not solely of trusts but more broadly of trustscapes. The trustscape is the collection of relationships formed around a trust. In the simplest case, it may be limited to the grantor, trustee, and beneficiary. In many families, it may quickly encompass multiple beneficiaries, multiple trustees, trust protectors, advisers, and others (see Figure 8.1).

Diagram shows trust creators, trust beneficiary and co-trustee, attorney and trust protector, distribution committee, and trust beneficiaries of Jack Smith senior trust and relationships among them.

Figure 8.1 Example of a Trustscape

We recommend that trustees and beneficiaries draw a picture of the trustscape for each of their important trust relationships. It is a useful tool for remembering all the interests at play.

Second, when you create a new trust, a few points of vocabulary are crucial to set the right intention of everyone involved. For example, does the new trust embody a gift or a transfer? (For more on this distinction, look back to Chapter 5.) Most trusts embody transfers.

In addition to asking whether the trust embodies a gift with spirit, if you are setting up a trust, ask yourself, “Am I a trust creator or a trust signer?” Most grantors are only trust signers. They affix their names to a document that they may not understand and that certainly does not capture their words or spirit. Trust creators, in contrast, find ways to make sure that the trust documents reflect the spirit of their gifts. These may include writing a letter of wishes to the trustee, including a preface to the trust, composing an “ethical will” to accompany the trust, or writing a personal summary or other precatory language. It may mean something as simple as thinking seriously about the name of the trust, rather than simply affixing a family name along with some legalese.

That’s why one of us (Jay), for the last decade of his practice of law, would not write a trust without the grantor including some statement to the effect that:

This trust is a gift of love. Its purpose is to enhance the lives of the beneficiaries.

Imagine if you were a beneficiary reading those sentences at the beginning of your trust? Would it be more likely to seem a burden or a blessing?

Many times, the only expression of purpose in a trust comes in the standards by which the trustee is to evaluate discretionary distribution requests, and those standards are often expressed in the words, “health, education, maintenance, and support.” These words are used because courts have, over the years, established specific meanings to them—what’s included in, say, “health” and what’s not—although there are still areas of grey. (For example, is elective cosmetic surgery part of “health”? It depends.)

True trust creators can go beyond this minimal approach in a letter of wishes or letter to the trustee and beneficiaries by saying more about the trust’s purposes. For example, some expressions of purpose that we have seen include:

We have also seen grantors compose short written statements to explain the intentions behind some of these provisions. Here are just a few examples:

Activity

Trusts succeed only if they express and encourage active—even proactive—giving and receiving. Too often, trusts fail or become stultifying because they embody inactivity that turns into reactivity.

We have shared some of the steps that a grantor can take to start to be an active giver. A good prospective trustee or advisor will encourage grantors to be active givers right from the start.

A wise trustee can be an agent for active giving and receiving at other moments in a trust’s life, too. For example, the onboarding of a new beneficiary is a crucial time for encouraging activity. Such activities are part of the trustee’s role as a regent or mentor. Some of the things a trustee can do to this end include:

  • Reread the trust and related documents to remind yourself of its major terms.
  • Write a letter or e-mail to the new beneficiary introducing yourself, setting out a time and place for your first meeting, describing your hopes for the new relationship, offering a proposed agenda, and inviting the beneficiary to add to the agenda and to bring questions.
  • Approach the new beneficiary not just with a prevention-focused mind-set—that is, a focus on averting possible inappropriate requests or inquiries— but a promotion-focused mind-set, that is, an attitude looking for ways that this trust—within its legal and financial limits—can enhance this beneficiary’s life.
  • Be mindful of the narrative that you, as a trustee, bring to this beneficiary, this family, or to beneficiaries in general. Is this narrative helpful? Or does it include generalizations or prejudices that might get in the way of a successful relationship?

If a beneficiary is to be an active recipient, that individual has some work to do, too. That work may include:

  • Ask yourself, “What are my dreams? What are the activities that I feel best engaged in? What are my strengths? What are my internal hurdles? When have I worked and grown through working? If I haven’t, where might I get that experience? What are the important relationships in my life? Do I feel able to advocate for myself? If not, where can I learn that skill?”
  • Write a letter or e-mail to the trustee introducing yourself, describing your hopes or aspirations, and setting out some things that you would like to talk about or learn about at your first meeting.
  • Read the trust document and come to the meeting prepared with questions.
  • Review your own narratives about trustees, about the grantor, and about yourself as a beneficiary. Are those narratives helpful or do they get in the way?
  • Finally, cultivate a spirit of gratitude. That may be a hard step, especially if the grantor is long gone or is someone with whom you had a difficult relationship. Maybe then the gratitude focuses on some other aspect of being a member of this family, or on goods that have come from other experiences in your life. Whatever the source, expressing gratitude is an important part of completing a gift.

In sum, we share below the roles and responsibilities of beneficiaries and trustees. These are not legal lists. Rather, they are responsibilities that, if pursued, will make the trust a positive human force in the lives of everyone involved. If you are a trustee or a beneficiary, you may want to consider posting a copy of the respective list wherever you are sure to see it when reviewing your trust.

 

Distributions

Most simply, trusts have three functions:

  1. Administration: keeping track of the trust assets, taxes, notifications, and other legal requirements.
  2. Investment: managing the trust assets to produce growth, income, and other aspects of a desired return.
  3. Distribution: distributing trust income or principal to beneficiaries in accord with the trust’s provisions.

While all three of these functions are important, the ultimate purpose of a trust is to make distributions to the beneficiary. And yet the distributive function typically lies fallow in most trusts. Trustees usually focus on administration. Grantors and even beneficiaries often pay a great deal of attention to investments. Distributions feel like an afterthought or, worse, an undesirable eventuality, to be discussed as little as possible and to be put off as long as possible. As a result, many beneficiaries find it confusing to make a discretionary distribution request. And many trustees find themselves responding to such requests in a reactive manner.

However, if there is any way by which trusts are going to become blessings rather than burdens, it is going to be through a thoughtful and proactive distribution function. This function cannot be an afterthought. It must be a primary intention from the beginning of the trust.

That’s why the third question we shared at the beginning of this chapter is so helpful: “If you had to distribute the entire corpus of the trust tomorrow, would the beneficiary be ready to receive it?” Or, conversely, “If the trustee were to distribute the entire trust corpus tomorrow, would you be ready to receive it?”

To bring the distributive function to life, we propose a new model for what we call a “humane trustscape.” Several forward-thinking families with whom we work are testing this model in its full form. Others have incorporated elements of it. It is not for every trust; but it does provide a goal to which specific trustscapes can aspire, based upon their particularities.

To begin, we start with what, in our experience, is the model of the traditional trustscape (see Figure 8.2).

Diagram shows relationship between trust protector, institutional co-trustee, individual co-trustee, and beneficiary in traditional trustscape.

Figure 8.2 The Traditional Trustscape

Here an institution and individual cotrustee exist in a somewhat ambiguous relationship in the middle of the field. They are clearly superior to the beneficiary, who is at the bottom of the system. But above them, perhaps, floats a mysterious trust protector, whose duties are broad but obscure, and who perhaps could swoop in at any moment to dislocate them.

In contrast to this traditional trustscape, we offer the following model (see Figure 8.3).

Diagram shows relationship between distribution committee, institutional trustee, beneficiary, office of beneficiary, and trust protector in humane trustscape.

Figure 8.3 Model for a Humane Trustscape

Here the picture is completely different. The beneficiary is at the center of the system. This by itself is a major change.

One way to put this change is to say that in the traditional model the beneficiary has neither ownership (legal title being vested in the trustee) nor control (which belongs to the trustee or perhaps the trust protector). In the humane trustscape the family achieves what we call “control without ownership.” Beneficiaries truly come into their beneficial ownership of trust assets, as their interests are central. At the same time, the beneficiary does not own those assets, protecting them from government sequestration or from terrible mistakes (such as an accident or a failed marriage) that could destroy the beneficiary’s financial capital. This concept of control without ownership is the Holy Grail of wealth planning, yet often the forms impede this function.

Key to giving the beneficiary some sense of control is the body we call the Distribution Committee or DC. The DC may be a committee or one person. Its sole function is to advise the trustee about distributions. In pursuit of that end, it must get to know the beneficiary and understand what kinds of beneficiaries could be helpful to that individual’s flourishing. The DC then goes back to the trustee with that knowledge. It advises; it does not distribute. As a result, it is not a fiduciary. The DC works for the trustee and is paid from the trust. The trustee can change the DC at any time, though the function will likely exist so long as the trust is making distributions.

On the other side of the diagram is the Office of the Beneficiary (OTB). As with the DC, this could be an individual or a group. The difference is that the OTB serves the beneficiary alone. Its function is to help the beneficiary ensure that he or she can integrate the trust and its distributions effectively into his or her life. This work may take the form of helping the beneficiary learn about the trust or about finances. It may take the form of mentoring the beneficiary about work, relationships, or communication. For these different forms, the OTB may draw upon different individuals: family members, friends, advisers, or family office staff. But the OTB serves the beneficiary. The beneficiary decides when and to what degree the OTB functions. Ideally, the beneficiary should also pay for the OTB, either out of pocket or from distributions for his or her benefit.

Our model also includes a trust protector. But this protector is not the nebulous, “super-trustee” of most traditional trustscapes. Instead, we recommend using a protector in a solely mediative function. The protector will have only one task: to mediate disputes between beneficiary and trustee. To achieve this goal the protector will need to talk at least annually with the beneficiary and the trustee, to check on the health of the relationship. But the protector will become active only upon the request of the beneficiary (or possibly upon the request of either the beneficiary or the trustee). In such a case, the protector will try to convene a discussion of the situation and mediate a result. In the case of an impasse, the protector has the power to remove the trustee and appoint a new one—or to do nothing. Because the protector has no purview over distributions, it would not be a fiduciary. As a result, this role might be the perfect one for family elders, friends, or trusted advisers who otherwise would not or could not serve as a trustee.

Finally, there is the trustee. We suggest an institutional trustee because in this model the trustee’s main function will be to maintain strong administration, oversee the investing, and establish and heed the advice of the Distribution Committee. Institutions with a track record for fidelity are well-positioned to serve in this role, as a sort of backbone to the system, while integrating the wisdom of the rest of the parts.

Conclusion

If there is anything that our collective decades living with family trusts has taught us, it is humility. Though simple in concept, the task of living well among trusts is amazingly complex. Our hope is that by focusing attention on the human side of trust relationships, we will be able to achieve the goal of increasing the number of such relationships that are blessings rather than burdens, and that truly embody the best part of grantors’ dreams to enhance the lives of family members for years to come.

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