Family Trusts that Preserve Family and Preserve Trust
Family trusts that preserve family and preserve trust
by Hartley Goldstone
A decade ago I left behind trust administration and set out to solve a riddle. Why do family trusts commonly preserve family financial assets, yet fail to preserve either family or trust?
Sound investing and tax tactics are, of course, important. At the same time, my experience is that families who ‘do’ trusts well know that long-term success hinges on the personal relationships that trusts create.
With this in view, it is my intention to show that a particular relationship – the relationship between trustee and beneficiary – is vital to a family’s broader scheme to prepare beneficiaries to live meaningful, productive lives; to illustrate the emotional toll that a purely technical approach to trusts has on beneficiaries; and finally, to persuade readers that the under-appreciated distributive function is a key to breathing new life into family trusts.
Blessing or burden?
Unravelling the riddle begins with a question. Is a beneficiary more likely to describe his trust as a blessing or burden?
To answer this question, we’ll journey through space and time to New York City during the late 1980s. James E Hughes Jr and three other top-tier family advisers have convened a meeting of 85 or so beneficiaries. Jay asks the beneficiaries for a show of hands: are your trusts more burden or blessing? The success of their trusts will be measured by how Jay’s question plays out in the lives of these beneficiaries.
To everyone’s surprise, 80% of the beneficiaries say their trusts are a burden, 10% say blessing, and the remaining 10% aren’t sure.
Impossible, some will say. Did this sample reasonably represent the larger beneficiary population? Was some sort of ‘groupthink’ at play?
Fair questions. But sceptics are asked to look beyond this type of short-range assessment.
Jay has posed the ‘burden or blessing’ question to over 1,000 beneficiaries during the decades following his initial inquiry. There’s been little change in the 80% burden/10% blessing ratio. I am comfortable that the overwhelmingly negative responses confirm a trend that my experience bears out – a trend that has implications for trust creation and administration.
So what? Who really cares – or should care – about how beneficiaries describe their trusts when trust creators and trustees are not around? Who has a stake in these claims?
At the very least, families living with trusts should care. In the United States, some experts estimate that by the third generation following the creation of substantial wealth, upwards of 90% of a family’s assets will be owned by trusts.
If these numbers are accurate – 90% multigenerational wealth in trust, 80% described as burdens – whether trusts succeed or fail amounts to more than passing interest. Ultimately, what’s at stake is the welfare of the family’s ‘rising generations’.
Trusts solve problems
As we continue to unravel the riddle, it helps to be acquainted with how trusts originated 1,000 years ago in England.
Picture in your mind a lord of the manor. The lord’s affairs are complicated. He owns a household with many servants. Also, extensive lands populated with serfs who are engaged in farming, timbering, and perhaps some form of commerce.
One day the lord is called to join the Crusades and do battle in Jerusalem. He’ll be gone for an extended period and might not survive to return home.
The lord asks someone he trusts to look after his lands while he is away. He transfers title of his lands to the trusted person. When the lord returns, the trusted person will transfer title back. If the lord dies before returning home, title will be transferred to whom the lord has designated.
This arrangement (which we call a trust) solved the lord’s problem – I need someone (a trustee) to steward my property in my absence.
The takeaways are twofold.
1. Trusts solve problems; and
2. Trusts create relationships.
What problems do trusts solve today? To answer that question, take a moment to imagine ‘Grandparent’. Years ago, Grandparent had a promising idea. With hard work, skill, a talented team, and good luck, the idea made Grandparent wealthy.
Grandparent loves his grandchildren very much. He spends sleepless nights wondering how his good fortune will affect them.
Grandparent’s greatest hope: wealth will be a helpful resource as grandchildren gain self-awareness, become educated, and pursue their life’s goals.
His greatest concern – What’s nerve-wracking to Grandparent is whether a substantial inheritance will ruin his grandchildren and lead to lives of unhappiness, or worse.
Grandparent makes an appointment with Estate Counsel. Estate Counsel is a top-notch tax lawyer who is known for cutting-edge strategies. Grandparent returns home with a binder jam-packed with documents that solve his asset-preservation problem. But not one of them gives thought to the lifelong relationships that will make or break Grandparent’s plan.
To sum up, Grandparent’s trusts preserve his family’s financial assets, but fail to preserve either family or trust. Sound familiar?
No wonder so many beneficiaries see their trusts as burdens. No wonder litigation related to trusts is increasing.
A positive approach
The next strands of the ‘burden or blessing’ riddle can be unravelled in any number of ways. I will mention two: fix what’s gone wrong or build upon what’s going right. The former – traditional problem-solving – looks to reduce breakdowns and make repairs. I adhere to the latter approach: focus on beneficiaries who describe their trusts as blessings. Figure out what’s going right for them (while acknowledging difficulties); build upon that positive core; and set sights on arriving at an exceptional outcome.
Sounds nice, but – how to begin?
Enter Dennis Jaffe. Dr Jaffe studies wealthy families whose households have found ways to pool resources and cooperate with each other for at least 100 years. His research shines an LED floodlight on what it takes to build great families, giving special attention how they release the potential of rising generations.
As Dr Jaffe puts it, success – broadly speaking – rests on the foundation of two achievements:
· In public, the family enterprise (family that shares control over multiple assets) is a community icon. The founders are lauded as creative social leaders, while their children are scrutinised for how they use their privilege;
· The private, hidden success is building a great family that produces ‘rising’ generations ready, willing, and able to shoulder the emerging challenges.
Legacy families share structures to help get the job done: family businesses, family office, and family foundation to name a few. If designed well, the structures mingle with high-quality parenting and thoughtful learning opportunities to release the potential of rising generations.
A family member who works full-time as family relationship manager is tasked to develop the human capital of the now hundreds of family members:
We have a whole set of things we do with the family. We start at age 12 and categorize them from age 12 to 20. We want some of the 20-year-olds to be the mentors of some of the 12-year-olds … Education doesn’t revolve around what we do, it revolves around who we are.
Dr Jaffe’s research gives valuable context to our inquiry. As with any research project, however, its scope is limited. Family trusts fall outside of the study’s playing field. Interviewers do not ask detailed questions about family trusts.
Time to leave the radiance of Dr Jaffe’s floodlight and focus a spotlight on the trustee.
The trustee’s role
The trustee – especially after the trust creator has passed – will shape the beneficiaries’ trust-related experiences.
Trustees tend to treat beneficiary 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.”
A woman in her forties takes me aside at a conference. “My life is successful by almost any measure,” she explains. “I am a tenured professor at an Ivy League university. I have a wonderful husband and children. I sit on several non-profit boards and currently chair my family’s foundation. The only place that I am treated like a child is when I visit my trustee. I have come to terms with this, but my concern is that my children will have to go through the same thing.”
The authors of Family Trusts differ. We know that trustee/beneficiary relationships are whole-hearted human relationships. Go with this stance, and it becomes clear that Grandparent’s greatest hopes – that trusts will enhance the lives of his loved ones – are more likely to show up.
A beneficiary is challenged with addictions for much of his adult life. The trust that his late grandfather created purchases a condominium for him, supports his basic needs and pays for a variety of treatment programs over the years. His father’s heartbreak and frustration lead him to alternate among compassion, hostility and estrangement. Beneficiary, father and I have regular phone contact and occasional ‘crisis meetings.’ Son puts together sustained sobriety and other productive steps toward resurrecting his life. Father and son reconcile, and they include me in conversations about how the family’s trusts can bring the larger family together.
Trustees have three responsibilities: administering trusts, investing trust assets, and distributing (or not distributing) funds to beneficiaries.
The distribution responsibility is less clear than the others. Most people are familiar with trustees acting on beneficiaries’ requests for money. What’s less apparent is the trustee’s responsibility to cultivate solid relationships with beneficiaries.
When asked how much time they spend on each responsibility, trustees estimate 45% administration, 45% investing, and 10% distribution. Probing further, they let slip that distributions are an afterthought, meaning nothing happens until a beneficiary requests funds. Upon hearing the request-hitting-desk thud, the trustee moves into action.
Trustees cannot expect to have an exemplary relationship with beneficiaries anchored in quantitative outcomes alone – no matter how good those outcomes are. It’s spending a sufficient amount of time and energy on qualitative matters that brings about flourishing relationships.
Failure to plan a clear distribution process may leave beneficiaries feeling like they are not understood, and trustees tending to be overly cautious out of concern for making mistakes.
How will trustees transcend this when complicated relationships and inherent tensions exist? By initiating conversations carefully designed to address the challenges and realise the enormous potential that every trust relationship holds.
Trust beneficiaries, especially first-timers, often feel overwhelmed when entering a relationship with a trustee. Anxiety, trepidation and confusion are natural and can lead beneficiaries to become defensive and adversarial.
That’s why it’s largely up to the trustee to set a tone of cooperation and collaboration.
Here is a sampling of entries to begin a ‘proactive trustee’ checklist. Stay in touch with beneficiaries. Get to know them. Develop rapport. Mentor when appropriate. Partner with mature beneficiaries. Join them as they think through requests for funds. Help them make wise decisions.
Taking this kind of initiative is a non-starter for some trustees. Some lack interest; some lack skills. Some have interest and skills, but lack time.
Recognising this, in Family Trusts we advocate forming distribution committees (which may consist of a single person) to advise trustees about beneficiary issues, much as investment committees advise about investments.
Committee member(s) will have the interest, skills and time to get to know each beneficiary. They will become familiar with the thinking behind a request for funds, sometimes long before the beneficiary is ready to make the request. They will ask questions to ascertain whether the request, or some other course of action, is in the beneficiary’s best interests.
A recent college grad asks for help drafting her first business plan. Our conversation includes how the trust might support her dream and what would be required of her to receive financial backing. She does her homework and concludes that the idea is not sound. She goes back to the drawing board to start over again.
Following conversations with the beneficiary, committee members will enlighten the trustee. The trustee (and not the distribution committee) will have authority to approve requests.
We have a ‘hunch’ that proactive distribution committees are a big step towards solving our riddle. We call it a hunch because the use of distribution committees is not yet widespread. But – as pollsters say – early returns are promising.
Here’s how it sounds when a distribution committee has elevated beneficiary relations from afterthought to weighty. Listen to a committee chairperson:
Our committee has never been asked to make a distribution because the beneficiaries personally own significant assets. Nevertheless, every committee meeting is opened by asking: Do we have any requests before us? And the response is always “No.” The meeting continues with this question: “What is the capacity of the beneficiaries to receive funds?” A discussion of each beneficiary ensues.
After firmly planting ‘proactive beneficiary relations’ on their mental maps, some families have renamed their distribution committees – calling them ‘beneficiary relations’ committees.
We’d like to see the practice catch on.
The final twist to the tale
Our final clue to solve the ‘burden or blessing’ riddle is knowing the difference between distributions with spirit and transfers. Distributions with spirit enhance a beneficiary’s life; transfers are little more than accounting entries that promote entitlement and dependency.
Transfers are the mere movement of money from one person’s balance sheet to another’s … Gifts with spirit, in contrast … have clear purpose and intention. They are made based on an understanding of who the recipient is and how to help that person integrate the gift into his or her life.
Stories win the prize for highlighting the differences between gifts with spirit and transfers. Like everyone else, beneficiaries and trustees create stories to put a given moment into context. The story becomes their reality – and might serve them well, or not so well. The point is the ability to direct the thinking: trustees and beneficiaries can decide upon their point of view – trusts as burden, or trusts as blessing.
Compare this tale:
A soon to be 21-year-old had been orphaned at a very young age, his parents killed in a tragic car accident. Growing up, many of his expenses are paid from a trust holding substantial life-insurance proceeds. Upon turning 21, the trust will come to an end and he will receive a considerable sum. Might this approaching event add firmness and a real sense of future to his perspective? In this case, no, for he happens to be immature, showing little inclination to plan beyond his payday. He tries to game the system by creatively plotting to secure an early distribution to keep his ‘friends’ around. Within a year following his 21st birthday, the money is gone, and so are the friends.
To this one:
For years, a beneficiary granddaughter and her husband have been trying to conceive children, without success. She comes to the trustee to ask for funding of in vitro fertilization.
The beneficiary’s grandmother had created the trust for the benefit of her daughter and grandchildren. The standard for allowing distributions to grandchildren is ‘maintenance, education and general welfare,’ without mention of medical or health.
Listen in as the trustee works her way through complexity.
“Our analysis covered many angles. Would in vitro fertilization come under maintenance and general welfare? Who would object to an accounting of such a distribution? What would the grandmother have wanted? Were there ways of benefitting the family that weren’t contemplated when the trust was originally created? What’s the benefit to the family for making such a distribution and what is the potential risk to the trustee?”
The distribution is made. When the child is born, the trustees all “feel like godparents.” 
And this one:
A young mother with toddlers at home asks for funds to pay for a cleaning service. Her trustee, a self-described family curmudgeon, has a policy of making distributions under two circumstances only: to pursue special opportunities on the upside and as a safety net on the downside. The middle ground is up to beneficiaries to take care of with their own resources.
Trustee consults his mentor, saying: “My first reaction was ‘obviously not.’ Hiring a cleaning woman is clearly a standard-of-living matter – a subsidy – that she should take care of herself. Before responding to the beneficiary, I decided to seek your counsel.”
“Let’s look at this a little more closely. Does the beneficiary work full-time?”
“Yes,” Trustee responds.
“Does she have two young sons she has to raise?”
“Is her husband fully occupied with his job?”
“How much time does she have for herself, in light of all those other things she has to do?”
“My guess is: Very little.”
Mentor thinks for a moment before saying: “The beneficiary is very busy … having a cleaning woman come in once a week would give her a little free time to sit back and relax… to unwind over a cup of tea. Would you consider having this little bit of time for herself to be an enhancement or a subsidy?”
Trustee: “Well, I guess – an enhancement, when you put it that way.”
Trustee pays the bill.
Need I say more?
Often, the way we frame a problem actually gets in the way of solving it. As Albert Einstein famously said: “We cannot solve our problems with the same thinking we used when we created them.”
Sometimes, all that’s necessary to initiate significant change is to tilt our point of view a bit. This article delved into the problem of the overwhelming number of unhappy beneficiaries. The traditional way to frame the problem is one of legalistic risk management.
But suppose that we shift our focus and begin to see a trust – first and foremost – as a relationship among flesh-and-blood human beings. Wouldn’t that lead to better cooperation and collaboration?
Estate Counsel overlooked a chance to bring Grandparent’s greatest hopes to life. What was missing was deliberation about the plan’s impact on the long-term sustainability of the family (as opposed to sustainability of the family’s financial assets). Scant attention was paid to whether the trusts, as written, would be a positive force at all stages of the beneficiaries’ lives. The trust agreement lacked guidance to connect trustee and beneficiary to broader efforts to prepare the rising generations to lead productive, meaningful lives.
Had Estate Counsel been of a different mind, he might have offered Grandparent the opportunity to purposefully name the trust. He might have offered Grandparent the opportunity to craft a preface. He might have suggested that Grandparent write a letter of wishes to accompany the legal documents in the jam-packed binder.
But he didn’t. It’s now up to the trustee to align expectations. The trustee’s basic requirement for administering the trust turns first to ‘do no harm’. The trustee’s highest duty follows – to administer the trust in such a way that the beneficiaries’ lives are enhanced.
The trustee takes the first step. He reaches out to the beneficiaries. He remains current, directly and with guidance from a beneficiary relations committee. When contemplating a request for funds, he (or a member of the beneficiary relations committee) asks the beneficiary: “What do you hope to accomplish by making this request?” and then “Why is that important to you?” Soon, the trustee (or beneficiary relations committee member) and the beneficiary are brainstorming assorted ways to accomplish the beneficiary’s goal. Does the beneficiary have sufficient assets outside the trust? And finally – can trustee say “yes” to the request? If not, is there a different way to look at the beneficiary’s goal – one that would lead to a request that can be approved?
Experiences like these build trust. Over time the beneficiary moves his trustee encounters to the ‘blessing’ column. Everyone benefits because the relationship is mutually fulfilling.
The riddle is solved. Grandparent’s family trust will preserve family and preserve trust.
 This article explores themes in Goldstone, Hughes and Whitaker, Family Trusts – A Guide for Beneficiaries, Trustees, Trust Protectors, and Trust Creators (Bloomberg Press, 2016), which I will refer to as Family Trusts. Family Trusts has a long line of predecessors. For starters, I suggest Jay Hughes Jr’s classic, Family Wealth – Keeping it in the Family (Bloomberg Press, 2004); Hughes, Massenzio and Whitaker, The Cycle of the Gift (Bloomberg Press, 2013), and Hughes, Massenzio and Whitaker, The Voice of the Rising Generation (Bloomberg Press, 2014); and Goldstone and Wiseman, TrustWorthy – New Angles on Trusts from Beneficiaries and Trustees (Trustscape, 2012).
 A ‘rising generation’ is a family’s succeeding generation. See The Voice of the Rising Generation, p14: “Whatever your exact relationship to the founders, you [the rising generation] are rising within a world that those founders helped to create … Your task then is twofold: to recognize the reality of the world in which you are rising but also to rise, responsibly and happily, in a life that you create.”
 Dr James Grubman pointed out in a recent email: “Steward and trustee have a common root of ‘administering or taking care of property for someone else.’ Both arose in Middle or Old English in the 1500–1600s. ‘Steward’ comes from the root for ‘house’ or ‘hall,’ – a steward was someone who would take care of the house or hall when the lord is away. So both steward and trustee have common meanings if not obviously common word roots, both originated in the necessity to have someone care for your property in your absence, and both imply a responsibility to be a good caretaker for the benefit of someone else, not yourself.”
 See Warnick, The Purposeful Trust Handbook (Purposeful Planning Institute, 2013) for an approach that preserves financial assets while addressing ‘human’ concerns.
 At the 2017 Purposeful Planning Institute Rendezvous, a retired probate judge told us that half the matters coming before her involved trusts.
 Jaffe, Releasing the Potential of the Rising Generation: How Long-Lasting Family Enterprises Prepare Their Successors (Wise Counsel Research, 2016). This is the third Working Paper arising from Dr Jaffe’s ongoing 100-Year Family Enterprise Research Project. Dr Jaffe and his team have interviewed members of more than 70 family enterprises from 20 countries, each of which “(1) Created a successful business, or set of enterprises, with current annual revenues of more than US $200 million (with the average family’s net worth being much higher). Half the families had sold their legacy businesses, and transitioned them to become a family office, often including a family foundation. (2) Successfully navigated at least two generational transitions, with control being passed to the third generation or later. (3) Retained shared connection and identity, with practices and processes that sustained their values as an extended family.”
 Releasing the Potential of the Rising Generation, p4
 Releasing the Potential of the Rising Generation, p45.
 From a recent conversation with Dr Jaffe.
 TrustWorthy, p9.
 TrustWorthy, p10.
 Trustworthy, p10.
 From a story told to the Beneficiary and Trustee Positive Story Project. For more information about the project, see ‘NavigatingTheTrustscape.com’.
 Family Trusts, p60. See The Cycle of the Gift for an in-depth look at giving and receiving.
 TrustWorthy, p9.
 Adapted from “We All Felt Like Godparents” in TrustWorthy.
 Adapted from “Philosophy Yes, Rigidity No” in TrustWorthy.
 These ideas are detailed in Family Trusts.