Looking at Trusts Through the Lens of Family Dynamics

November 22, 2021

By Natalie McVeigh and Elana Margulies-Snyderman

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Trusts are a tool for wealth preservation, but it begs the question about what wealth is being preserved. Financial wealth is the tool for the family to build human wealth. How this entity is set up and the relationships around it can enhance or inhibit how the next generations flourish. Trusts are legal documents, and that can make it challenging for people to understand them. Because there are so many variables and nuances to trusts, robust communication between all parties involved in the intended structure is paramount and can be as powerful as the trust itself.

What Is a Trust?

A trust is essentially an artificial entity, just like a corporation or partnership, formed to hold assets and follow a set of rules established by the trust creators—commonly called grantors. It is viewed as a relationship among the trust grantor, trustee(s) and beneficiaries. A trustee has a fiduciary relationship with the beneficiary, managing the assets on behalf of the beneficiary and ideally with the beneficiary.

The trust is set up when the grantor engages a lawyer, they develop a set of rules, and they name the trustee(s) and beneficiaries. The trust rules are usually quite specific including how, when and for what the funds can be used. Standard exemptions among most trusts include health, education, maintenance and support (“HEMS”). The grantor puts assets into the established trust, and the trustee ensures the rules are followed. It all sounds warm and fuzzy, right? The real relationship comes in after the legal work is done.

Trustee/Beneficiary Duties

Both trustees and beneficiaries have duties when it comes to the trust, and understanding these duties makes this potentially static entity a dynamic learning experience for both involved.

Trustee duties include the impartial administration, distribution, investment and responsibility of the account. Impartiality is likely the most challenging aspect because the grantor must step outside of themselves and determine what is right for the person being supported. The idea of making choices with versus choices for becomes critical. Even if the answer is no, the part the beneficiary needs to hear isn’t the no, it is the why. Why does this not make sense for me? When we learned algebra, you would get graded on the problems as they were solved, not so much the answers. This relationship to ensure the trust does not become an extended allowance is somewhat like learning algebra. Therefore, it is often difficult to have a family member be a trustee. There’s a closeness communication bias where we assume we know what someone we love and care for will do, yet we don’t quite listen to the new information.

Beneficiary duties include having a clear understanding of the trust, its mission and use; educating themselves about trustee duties; understanding the trust’s investments; meeting with the trustee regularly to understand the trust’s goals; understanding the trust’s governance structures; attending family meetings and more. Much of the onus is on beneficiaries to ask questions and ensure they understand how and why decisions are made. The reason this relationship is critical because the beneficiary, at some point, takes control of the assets.

The human element and relationships between the grantor, trustee(s) and beneficiaries are important. Specifically, it is crucial to understand how they collaborate to educate themselves on their respective duties. Equally important is to ensure the assets sustain the wishes of the grantor and the family legacy so heirs can execute on their own passions.

When setting up a trust, a grantor letter or trust preamble is key to ensuring the heirs use the trust assets for which they are intended. For example, the son in a religious family wanted to use the trust assets to set up a medical marijuana store and the external trustee, a family friend, denied it. The heir went back to the family council for a trust review. The grantor was still alive and pointed to the trust was being used for entrepreneurship, and this business endeavor fit that mold. The trust did say that funds could be used to fund the business, but the trustees felt the family would not approve of this type of business. The trustees wound up engaging the grantor, but grantors will not always be there to intervene. So, a grantor letter or trust preamble explicitly stating trust intent is important.

If grantors are not alive when the heirs want to use the trust assets, the grantor letter is critical to confirm what the assets should be used for. Even if they are alive, parents or grandparents want to keep their relationship as family members the priority. That is why they often select a trustee(s) that is not themselves. The family relationship without these letters and space can start to feel like a transaction.

Special Provisions for Trusts

Trusts often have special provisions that can impact the parties involved:

Co-Trustee – A family member or beneficiary can be a trustee or co-trustee along with an institution in which decisions are made jointly. The advantage is more direct influence and control over the trust and more people to make an educated decision of what to do with the trust. However, having more people can leave the door open to more disagreements. When you have co-trustees, they all must agree on the decision.

Trust Protector – Intervenes with the trustee(s) on behalf of the beneficiaries.

It is important for all parties involved in trusts—including the grantor, trustee(s) and beneficiary—to understand the intention of the trust and ensure its rules support them because family assets are often tied directly to trusts. When the heir is educated on the trust, not only do they gain financial wealth, but they also gain various skills including the independence to select meaningful areas where the assets will be used.


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About Natalie M. McVeigh

Natalie McVeigh is a Managing Director in the Center for Individual and Organizational Performance and the Center for Family Business Excellence Group within the Private Business Services Practice and has more than 10 years of experience as a consultant and coach.

About Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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