As the old saying goes, “You can’t take it with you.” With that in mind, most family elders want to pass their wealth to their next generation. But it is almost impossible for them not to want to have some influence over how the wealth is used. If it’s a company or a group of assets an elder has accumulated over a lifetime, it is hard to pass it on without adding some conditions.
Creating a trust to take care of your family after you’re gone seems like a thoughtful and caring act, yet no decision has led to more unintended and contentious outcomes. Trust outcomes have erupted into Shakespearian battles over power, fairness, justice and sibling rivalry, tearing up the families they are meant to protect. It is tempting to attribute these disputes to the dark side of human nature, but they may also stem from the ways that trusts are set up and administered.
Trusts and distrust
Trusts emerged in the Middle Ages. When landowners left — often for years to fight in the Crusades — they entrusted their wealth to someone who could be relied on to take wise care of it, make necessary decisions around it and either give it back when the landowner returned or deal fairly with the family if they did not. This trustee was a special friend of the landowner and was tasked with caring for the dependent family, servants and retainers, who were not capable of managing the land and responsibilities on their own.
Skip ahead 300 years, and trusts have developed into a mechanism for elders to control wealth that is otherwise given away. Modern trusts are hugely popular for reasons that have strayed far from their origins. They are used to avoid taxes and keep decisions away from immature and unprepared family members. They allow elders to ensure that their wishes for how their wealth is used are observed after they’re gone, and to insure the well-being of the inheritors.
But this relationship too often has an unsettling quality for family relationships. It places a trustee in a quasi-parental relationship, between the parent and the maturing offspring. When the donor/parent is alive, the presence of a trustee often keeps the parent and child from having a direct and meaningful conversation about the future use of the family wealth, hindering their ability to engage candidly and openly with each other. It sends a message to the new generation that such talks are off limits. Many wealthy families report that they “never talk about family wealth,” as if somehow the topic is a sign of selfishness or rudeness, best shrouded in secrecy.
But one enduring assumption related to the establishment of a trust remains in place: that the beneficiaries — usually the next generation of family members — cannot be depended on to observe their parents’ wishes or manage the family wealth. This assumption may feel correct to the elders, but it too often does not sit right with members of the rising generation of the family, who want to make their own decisions.
It’s the thought that counts
Wealth holders often do create trusts with the belief that their children are not fully able to follow their wishes and make wise wealth decisions. Parents want to simultaneously pass on their wealth while setting conditions on its use. This makes sense if the heirs are children, but at what point are they ready to act on their own? What if the new generation is not incapable of making decisions but instead simply disagrees with their elders? Can those elders give them a gift and then prevent them from using it as they wish?
Adding to this dismissive message, many trusts are designated as “silent trusts” and include a provision that the beneficiaries are not to be informed about the resources or the nature of the trust. The mystery is meant to keep beneficiaries from having their judgment swayed by the resources potentially available to them. But this provision, well-intended as it may be, can backfire. First, young people have other means of discovering their family’s wealth, not all of them accurate or helpful (i.e., social media). Second, while silence increases the younger generation’s curiosity, it cuts off the elder generation’s awareness of NextGens’ desires, thoughts and plans. It reinforces the disconnect inherent in the trust relationship.
In fact, many heirs experience trusts as burdens and grow to resent them, feeling diminished and dismissed by their lack of power and ability to decide how to use their inheritance. They don’t view trusts as gifts from their parents, but rather as constant reminders that they were seen as untrustworthy or incapable of being responsible custodians of the family wealth.
What’s more, many heirs feel guilty about inheriting family resources — like they don’t deserve it. Other heirs, meanwhile, see inheritance as a drug that invites them to be unconscious and irresponsible, spending without thought or awareness of consequences. Neither outcome is what gift givers intend when setting up a trust.
Evolving responsibilities
The protective role of the trustee can backfire if the beneficiary believes they are mature enough to steward the wealth and manage their parents’ business and assets on their own. Tensions arise when the heirs assume the purpose of the trust is to manage their affairs and prepare them for a not-so-distant future in which they are ready to manage the family wealth, but the trustee does not fully embrace this vision.
In psychology, the self-determination theory suggests that for a person to flourish, three conditions must be present:
• Autonomy – The power to make decisions about their lives; personal agency.
• Relatedness – The ability to be in productive relationships.
• Competence – The capability, skills and knowledge to do what is needed.
If they remain in the beneficiary role under the care of a trustee, heirs often find it hard to develop in these areas.
Originally, the role of the trustee was only to maintain and expand the family’s financial wealth. That was the job. Period. Today, another facet of trustee responsibility is getting attention: taking care of the heirs. The modern trustee is often expected to use the family’s wealth to sustain the well-being of the beneficiary.
How can the trustee role be defined so as not to interfere with the proper development of mature skills and relationships? Two recent additions to Delaware trust law addressing trustee responsibilities have helped clarify how this can be accomplished. The new statutes — 12 Del. C. § 3345 and 12 Del. C. § 3325(32), both enacted this year — require and empower trustees to be more actively involved in supporting the personal development and well-being of beneficiaries.
Section 3345(c) states that the trustees and advisors of a beneficiary well-being trust shall provide the beneficiaries, individually and as a group, with “beneficiary well-being programs” as provided in the trust or, in the absence of such provisions, as the trustee determines. Section 3325, meanwhile, gives Delaware trustees the power to “provide financial education services to the beneficiaries either individually or as a group, regarding multi-generational estate and asset planning, intergenerational asset transfers, developing wealth management and money skills, financial literacy and acumen, business fundamentals, entrepreneurship, personal financial growth, knowledge of family businesses, and philanthropy.”
The emerging expectation that the trustee will actively work to develop beneficiary well-being adds another difficult and personal task to the trustee’s role. Developing well-being requires the trustee to build a relationship with the beneficiary — to learn and understand them. It also requires the trustee to allocate funds toward the goal of well-being. For example, the trust can be used to fund educational programs, mentoring and personal development plans for young and maturing beneficiaries.
So, what does this mean in practice? Before the end of the last century, a group of estate and family lawyers began to define this aspect of trusteeship. This group of professionals questioned the increasing use of conditions and limits on the gifts that were extended to the rising generation. Jay Hughes, a third-generation lawyer and co-author of The Cycle of the Gift, added meaning to what the group called the “gift relationship.” He observed that inheritances could be passed to children in two ways, each with very different intentions. One was as a transfer, with little meaning or personal intent. For example, an annual tax-free gift that arrives in the mail each year with no explanation. It’s a bureaucratic procedure, not a personal act. But other inheritances are offered as a “gift of love,” given freely and with no strings attached by the elder generation. A disconnect arises when the trust is presented as a gift of love, but is governed like a bureaucratic transfer.
Getting the trustee’s role right
How can a donor make his or her gift wishes clear to beneficiaries, in addition to (or instead of) tasking the trustee with impersonal control? Of course, this can be done via meetings in which the parents carefully share their wishes and values about money and wealth with their adult heirs. But these wishes can also be placed in a written letter and added to the estate plan attached to the will. Many parents are reluctant to talk directly to their children about money, wealth and inheritance, and so, if they have personal wishes, they only share them in a letter to be read after they’re gone.
It is strange that such conversations are rare, leading to situations where trustees must interpret or explain the wishes of the parent/donor. When that happens, a recipient can feel that he or she has lost an opportunity to have a meaningful exchange with a parent.
Setting strict conditions for beneficiaries’ use of an inheritance can be frustrating and painful. It also runs the risk of leading to an untenable situation. For example, requests that beneficiaries marry within one culture or religion or that they never sell a particular building or business can become obsolete as conditions change or misaligned as the purpose of the requests are not explained and there is no opportunity for modification. The trustee is often in a quandary as they try to manage a situation the donor never imagined, sometimes with the provision that they cannot talk about the donor’s wishes or the details of the family resources. The result is often distance, resentment, blame and conflict.
The intent of the well-being requirement is to empower trustees to take steps to develop the capability of the rising generation. Trustees might interpret this obligation as encouraging communication across generations, and discussion of the terms of the trust. They might ask the beneficiaries to talk about their needs and how the trust might help meet them, even to the point of changing the way they distribute funds and share information. It adds a whole new dimension to the trust process, allowing for a more mature and engaged beneficiary group. The trustee-beneficiary bond is no longer necessarily a never-ending parent-child relationship.
The new Delaware rule adds an opportunity for mutual learning and collaboration. While the beneficiaries are governed by the trustee’s decisions, they can achieve influence over these decisions by making their wishes known, and even suggesting changes.
In one large fourth-generation family trust, governed by a trustee who was a lifelong friend of their grandfather, the G4 heirs began to meet and talk about what they wanted from their trust and inheritance. They talked about governance, ways to become involved in the various family ventures and the family’s long-standing distribution policies. The G4 heirs felt that while these policies were appropriate for the much smaller group of G3 family members, they had become outdated.
The beneficiary group researched and considered what sort of distribution policy made sense given the need to preserve capital, fund their investments, provide for future generations and give to causes they supported. They discovered that they could allocate to all of these and still share more with their generational group. They did research and prepared proposals, on their own without being asked by the G3 or the trustee.
At first, when the G4 members laid out their plans, their parents and the trustee were astonished at their presumption. But they overcame their surprise and listened to the younger generation’s concerns. The elders’ initial feeling was that the young group was self-serving and short-sighted, but they were ultimately persuaded by the figures and data presented. The G4 heirs’ plan was largely enacted and the young cohort felt empowered and respected. In fact, they continued to work together to further define governance for the family.
Embodying the role
So, how can the trustee inhabit this expanded role of promoting beneficiary well-being? The shift begins when the trustee is engaged by the family wealth holder. The trustee can explain the goal of promoting well-being and urge the donor to talk directly to the rising generation, and/or to write a personal letter to the beneficiaries explaining their intentions and desires. The trustee might push against excessive secrecy and present the need for transparency so that the younger generation can prepare to become responsible stewards. The trustee can also promote family communication about the need for NextGen wealth education and create conditions for NextGens to participate more actively in the decision process as they mature.
The result is that the trust will look less like a closed and hidden box under the control of a professional parent-figure, and more like a framework for helping and mentoring a new generation to develop skills, prepare for responsibility and, sooner rather than later, manage the resources of the family. The trustee can then step back and oversee, with minimal interference, as the beneficiaries become partners and owners in their own right.