In a September 2012 Trusts & Estates article, “The Virtual Clone Trustee,” Avi Z. Kestenbaum and his co-authors proposed the use of a trustee of the future, the virtual clone trustee (VCT). By using an artificially intelligent computer program, the VCT would make decisions exactly the way our clients would in the same circumstances. We would gather data about our clients, through tests such as the Rorschach inkblot test, the Myers-Briggs Type Indicator and the NEO Five-Factor Inventory, as well as through direct observation of our clients’ daily behavior, and then enter the data into a computer. Finally, with the accuracy of behavioral predictive software, the computer algorithm would make decisions “like our client.”
While offering our clients the option of naming a VCT to administer their trust long after their deaths would be an exciting alternative, it simply isn’t a possibility yet. However, the technology looms on the horizon, and we may get there sooner than we think.
As with all our efforts to help clients find the optimal trustee, even if VCT software were available today, it still wouldn’t be the perfect solution. In addition to the challenges mentioned in the article, clients may not want to spend a lot of time collecting data and may not want to divulge all of that information. The VCT’s decision will only be as accurate as the data collected. Another challenge may be gaining the clients’ trust in the software. Some of our clients already seem to have an irrational fear of corporate trustees, and we believe that the main reason some clients are reluctant to consider using a corporate trustee is the family’s perceived loss of control over trust decisions. It’s conceivable, then, that the fear of loss of control will be even greater for a virtual trustee than for a traditional corporate trustee.
Until a VCT is available, we’ll need to use tried and true methods of ensuring that human trustees will take the grantor’s wishes into account when making decisions. Here are 10 tips for helping human fiduciaries succeed in the role of trustee.
Use Precatory or Mandatory Language
The most straightforward way to communicate the client’s values is to write them in the trust document. The language can be either mandatory or precatory, depending on the circumstances. Precatory language in a trust agreement usually includes such terms as the grantor’s “request,” “hope” or “desire.” It’s merely an expression of the grantor’s wishes and isn’t legally binding. Mandatory language, however, is a binding directive.
Our most common mandatory language is what we refer to as “trust baby” language. Often, the trustee is given the discretion to make distributions for health, education, maintenance and support (HEMS). The trust document specifically outlines the grantor’s wish that the beneficiaries embrace diligent productive work and not abuse drugs or alcohol and that the purpose of the trust is, generally, not to provide primary support for a beneficiary. The definition of diligent productive work could include being a full time parent, being a full-time student or pursuing charitable endeavors. To encourage hard work, the trustee is specifically permitted to interpret the HEMS distribution standard more broadly for a beneficiary whose life and parenting reflect the values of self-reliance, self-responsibility and productivity.
Conversely, the trustee is directed to narrowly construe the distribution standards for a beneficiary whose lifestyle is unproductive, who abuses drugs or alcohol or who allows himself to become a “trust baby.” In this case, the trustee would limit distributions to only those necessary to provide for basic needs or withhold distributions altogether.
Another way to avoid a beneficiary becoming a “trust baby” is by providing different distribution standards for different stages in the beneficiary’s life. For example, include more restrictive standards for distributions up to age 40 and more liberal standards thereafter.
Use a Special Trustee
Including a special trustee is another means to ensure that trust assets are maintained and distributed according to the grantor’s wishes. The special trustee would have extraordinary powers to merge trust assets, add a charitable beneficiary, modify the trust document or even terminate the trust. This concept is particularly useful in inter vivos trusts, because it gives the grantor an avenue to influence not only the trustee’s behavior, but also the trust structure during the grantor’s lifetime.
One common special trustee modification is to divide the trust into separate trusts for each beneficiary. Another is to modify the trust distribution standards to allow the special trustee to make extraordinary distributions of income and/or principal for the benefit, comfort or happiness of any beneficiary. The special trustee would then direct the trustee to make extraordinary distributions. (This discretion to make or forego making any extraordinary distributions would be solely reserved to the special trustee.) The special trustee could also modify the trust to reduce or eliminate distributions to a beneficiary who’s become a “trust baby,” as discussed above, when the discretion to withhold or reduce distributions was not one of the powers originally granted to the trustee in the trust agreement.
A special trustee can prevent a trustee from selling trust assets, such as when the sale wouldn’t be in the best interest of all of the beneficiaries of the trust or when the asset has important historical value to the family, such as a family business or ranch land.
Include Peer Review
Some of our clients have included the requirement of a peer review process, wherein an independent, experienced individual reviews the trust documentation and its operations. The trust agreement defines the frequency of this process. The peer reviewer also interviews the trustee and all current beneficiaries of the trust. After the review is complete, the peer reviewer prepares a written report and presents it at a meeting with the trustee and current beneficiaries. For an inter vivos trust, the review could include interviews with the grantor. The peer review process should help ensure that the trustee is properly giving effect to the grantor’s values, desires and wishes. At the time the peer reviewer is hired, he’s told that he won’t be hired as a replacement trustee or to perform any services to address any issues raised, no matter the outcome of the review. This is done to help ensure that the peer reviewer has no bias.
Have Grantor Prepare Letters
Often, a client wants to communicate his philosophy and desires in a side letter or memorandum to the trustee. This informal method of communication is cheaper than paying the attorney to put more precatory language in the trust document. It’s also easy to supplement or change with future communications, as the circumstances or the client’s values change over time.
These letters may express the grantor’s intention, such as that the trust is to serve as a source to supplement the beneficiary’s lifestyle, rather than a means to support it or the intention that the trustee make distributions for the purposes of matching income earned by the beneficiary.
Hold Annual Trustee Meetings
More recently, we’ve increased our use of meetings between the trustee and the grantor, so that the trustee can better understand the grantor and his values. These meetings can occur annually or at more frequent intervals. During these meetings, the trustee can ask questions of the grantor and help the grantor develop and work through the implications of his values as circumstances change over time. This idea works both for currently acting trustees and for trustees who will begin serving at some point in the future, such as at the grantor’s death.
Have Trustee Act as Mentor
Some of our clients have included the concept of the trustee as a mentor. The trustee is charged not only with managing the trust assets and making distributions, but also with mentoring the trust beneficiaries. In this way, the trust beneficiaries can be educated and trained to manage their own financial affairs in a manner that reflects the grantor’s values. This educational process will further ensure that the trust assets are used in a way that reflects those values.
Make Video or Audio Recordings
Video or audio recordings of the grantor can allow him to discuss matters of importance and factors that he would like the trustee to take into account when making investment or distribution decisions. This method allows the client to use non-verbal communication, such as facial expressions and gestures, and tone of voice, to be certain that he’s clearly communicating thoughts and emotions. In the past, it was relatively difficult to use this option. Now, however, most of our clients can easily record video with their cellphones and email it to the trustee or proposed trustee.
Publish Coffee Table Book
We recently met with a private publisher who produces personal biographies in the form of coffee table books illustrating a family’s memories, values and history. A book such as this would be an excellent way to pass on treasured values and ideals to future generations. Expressing the hard work done by the grantors to create the wealth may further motivate the trustee and beneficiaries to manage the trust money judiciously.
Create Video Documentary
Similar to the coffee table book, one of our clients created a video of her family history. The video included interviews with living ancestors, showed photos and heirlooms from generations past and discussed building the family’s business from the ground up. It captured the family legacy to be shared with descendants to come.
Include Grantor Statement of Creation
Some of our clients include a statement to the beneficiaries in the trust agreement that expresses the intent for creating the trust. (See “Sample Statement of Creation,” this page).
If such a statement is included, the attorney should urge the grantor to write it in his words. Communicating the statement in the grantor’s words will strengthen the guidance.