Although we don't hear it often, here’s the key question for anyone who’s involved in administering a trust: Does this trust define legal relationships that necessarily involve people? Or, does it create, and continue to affect, human relationships that necessarily play out in a legal environment?
Where the trustee places his emphasis is critical. In our just-released book, Family Trusts―A Guide (Bloomberg Press, 2016), co-authors James E. Hughes Jr., Keith Whitaker and I unpack the how and why.
Avoiding Trust Fund Babies
Picture grandma and grandpa who love their grandchildren dearly. Put yourself in their place―or maybe you're already a grandma or grandpa: When thinking about leaving a substantial inheritance to your grandkids, exactly what is it that keeps you up at night?
The answers from those who attend our presentations are fairly consistent. How to save that last tax dollar isn’t the cause of insomnia. What's nerve-wracking to them―and likely to your client families―is whether a substantial trust will lead to trust fund babies.
Purpose of Trusts
Then we ask our audience: Are trusts primarily a: (1) receptacle to hold assets; (2) tax strategy; (3) required document; or (4) meaningful relationship. We recently polled an audience of 90 family office executives. Eighty-six percent answer (1), (2) or (3). The other 14 percent said trusts are primarily a meaningful relationship.
So, just one out of seven has what we think is the correct answer. No surprise, though. When the elder generation meet with their attorneys to create estate plans, the focus most often is on protecting inheritances against taxes, creditors, spendthrifts, bad marriages and the like.
And why not? That’s what tax attorneys are good at; it's also what most clients walk in the door expecting.
Relationships with Beneficiaries are Key
Years ago, I left the practice of law to become a trust officer. I quickly learned that, while saving taxes may have been the driving force behind many of the trusts that I now administered, relationships with beneficiaries are where the action is. That’s where trusts succeed or fail.
But what kind of relationships? The tendency is to treat trust relationships as legal relationships at the core. “I am the trustee. You are the beneficiary. Our ‘dance’ together will often be mechanical and sometimes awkward. Occasionally we may break through to something more purposeful.”
In Family Trusts, we suggest―if you’ll excuse the repetition―that the relationships created by trusts be treated not as legal relationships that only happen to involve people, but first and foremost as human relationships.
Go with the latter stance, and it becomes clear that grandparents’ greatest hopes are that their trusts will enhance the lives of their loved ones.
The basic requirement for administering a trust turns into, first, “do no harm.” Followed by the trustee’s highest duty―to administer the trust in such a way that the beneficiaries’ lives are enhanced.
Does that mean that the trustee ignores legal constraints imposed by the trust? Of course not. What it does mean is that the trustee needs to get to know the beneficiary.
Typically, this occurs in the context of the beneficiary asking for a distribution. And too often that’s a reactive process. The beneficiary makes a request for funds, and the trustee moves into action. Based on which factors?
Approach to Trustee’s Distributive Function
In Family Trusts, we call for a proactive and robust approach to the trustee’s distributive function. Begin by understanding your own biases, positive and negative, toward the beneficiary. Are they serving you well? How might they be impacting your relationship with the beneficiary?
An earlier column offered the story of James, a beneficiary having a couple of co-trustees: one a family member, the other a trust company. James and his family trustee didn’t get along. When James asks for money to go back to school, the family trustee is inclined to refuse the request.
The institutional trust officer has a different take: “Because I haven’t known James as long as the family trustee has, there isn’t a negative history between James and me. After considering carefully what I know of James, I believe he is serious about the endeavor.”
Are your biases grounded in current circumstances? Are they serving you well? Are they serving the beneficiary well? Could they use a tweak here or there? If so, what difference would that make?
Only after this sort of introspection will it be time to proceed with your usual process for analyzing the beneficiary’s request.
I’ll have a lot more to say about the trustee’s distributive function in future columns.