Trusts are essential to high-net-worth families, not only for the transfer of wealth, but also for the transfer of legacy and family continuity. And yet, too often, there are serious gaps in education and understanding on the part of the grantors, trustees and beneficiaries. Grantors don’t fully understand the complexity of their situation, the various types of trustees available to them or the duties of the trustees. As a result, grantors often choose trustees without realizing what they’re asking them to do and end up selecting someone who isn’t capable of doing the job. Trustees often accept the role without knowing what it entails. They may lack a proper understanding of what the grantor intends to accomplish, which makes it difficult to execute their duties. The beneficiary may have little understanding of his responsibilities or the trustee’s role. Last but not least, it can seem unclear who’s responsible for keeping the trustee accountable, before he takes some action that results in litigation.
This situation presents significant risks to the integrity of the trusts and the wealth management strategies they support. So, what can be done? Throughout the lifecycle of a trust, grantors, trustees, beneficiaries and the professionals who work with them along the way need to take a more active role to ensure that all players are educated, engaged and held accountable.
Here are five steps to help accomplish this goal.
Explain Process to Grantor
When the grantor sits down with his estate-planning attorneys and other advisors, the first step is to clearly identify what the grantor’s goals are and to document his intent. All the key advisors—accountants, investment professionals, general attorneys, tax attorneys, estate-planning attorneys and psychologists—should bring their experience to the table to help the grantor understand the uniqueness of his situation, and, together, they should construct a trust that will meet the family’s complex needs.
The estate-planning attorney who’s drafting the trust should make sure the grantor understands what’s required from a trustee and help the grantor identify the right person or institution to act in that capacity. The attorney should explain to the grantor that there are different types of trustees—that is, personal trustees, corporate trustees, private trust companies or some combination thereof—and discuss the benefits and risks associated with each. Once the trust is laid out, and the grantor fully understands what’s needed, the decision should be made about what type of trustee to use.
Educate Trustee on Role
If the grantor chooses to work with a personal trustee, who’s responsible for making sure the individual selected to serve as trustee is fully educated about the duties and powers associated with the role? This step is critical, so that the trustee can make an informed decision about whether he’s willing and able to accept the responsibility. In an ideal world, without fee constraints, the estate-planning attorney seems to be in the perfect position to work with the grantor and help educate the trustee. Alternatively, if there’s a family office in place, the family office executive usually coordinates the advisors, advocates for the needs of the family and makes sure that all the key players, including the trustee, get the education they need to perform their duties.
Help Trustee Develop Strategy
If a grantor uses a personal trustee, once that individual has been selected, educated about his duties and has accepted the assignment, who’s responsible for helping the trustee develop a strategy and process for performing his duties? Once again, if there’s an established family office, the family office executive will work with the trustee to determine a strategy and process for performing his duties. This may involve helping the trustee to understand what can and can’t be delegated and, if there are multiple trustees or other parties involved, making sure duties and responsibilities for each are carefully allocated, defined and communicated. It should also include establishing a strategy for working with the beneficiary—including guidelines for frequency of communications and meetings. If there’s no family office, many of these duties are often neglected.
Help Beneficiary Understand Role
To paraphrase James E. Hughes, a philosopher and author who’s written extensively on this topic, an educated trustee has a greater understanding of how the trustee and beneficiary relationship is meant to work—from both a legal and personal standpoint..1 Therefore, the trustee should serve as mentor until the beneficiary’s level of understanding and personal development qualifies him to be a partner in the relationship. At that point, the relationship changes and the trustee becomes the beneficiary’s representative.
The trustee should educate the beneficiary on the trustee’s own responsibilities not only to the beneficiary, but also to the grantor. The trustee should help the beneficiary understand these responsibilities from a legal standpoint, as well as from a personal one. He should also help the beneficiary understand what the goals are for the trust. In other words, the trustee should communicate the grantor’s intent and what the trustee is trying to accomplish on behalf of the grantor and the beneficiary. The trustee should also clearly establish and communicate the working relationship, so the trustee and the beneficiary know what to expect from each other.
When they’re old enough, mature enough and able to do so, beneficiaries should hold their trustees responsible by monitoring their performance. Beneficiaries should be financially competent themselves. They should be meeting with the trustee regularly and actively preparing and participating to ensure the meetings are productive.
However, the beneficiaries aren’t the only ones who should hold trustees accountable. Anyone who’s a stakeholder in the success of the trust and its impact on family continuity—for example, the grantor if he’s still alive, or the family governing board, if there’s one—should be monitoring the trustee’s performance and measuring his success. The architecture of the trust and the systems in place for governance will also influence how the trustee’s performance is monitored and by whom. (See “How to Measure Success,” this page, for metrics to consider.)
A Complex Challenge
As anyone who works with high-net-worth families knows, nothing is ever as simple as it first appears. No two families have the same history, and each has a unique legacy. Plus, as the Family Office Exchange has documented extensively, the level of complexity is directly proportional to the level of wealth and the number of family members. In addition, trusts and trust law are intricate and constantly evolving. Finally, we know that the relationships among grantors, trustees and beneficiaries can be challenging. As a result, estate planning for high-net-worth families is especially complex.
This complexity means that making sure that grantors, trustees and beneficiaries are educated and prepared and that trustees are held accountable isn’t easy. It also means that the manner in which the steps outlined above are executed will vary. Factors, such as the structure of the family and its advisor ecosystem, as well as the architecture of the trusts and the infrastructure in place for managing them, will all come into play, as will the personalities and skill sets of all the players.
Despite the complexity and the challenges involved, these steps are essential to the success of the trust, the personal satisfaction of all parties involved and the long-term wellbeing of the family. The keys to success are just as much in the hands of the grantors, trustees and beneficiaries as they are in the hands of the advisors. They must recognize that they each have a responsibility for their own education and also to each other.
1. James E. Hughes, Jr., “The Trustee As Mentor,” www.jamesehughes.com/articles/TrusteeMentor.pdf.