Ensuring Trust in Trusts

Creating and managing a family trust can be complicated and onerous, but following some expert-recommended approaches can alleviate some of the burden.

The complex world of trusts, trustees and beneficiaries was the subject of a recent YPO global conference call sponsored by the Family Business Network. Speaker Holly Isdale, founder of Wealthaven, tapped into her 20-plus years’ experience in top Wall Street investment firms and her work with senior leadership, philanthropic boards and wealthy families to relate her views on how to navigate the often choppy waters of managing family trusts.

Trusts are complicated arrangements that require the carefully aligned activities and responsibilities of a diverse array of participants who may, at times, have conflicting priorities. Isdale suggests trust participants should undertake the following basic tasks to minimize issues and conflicts:

  • Focus on the basics. Three items need to be clearly articulated in the trust documents: clarity of purpose (why the trust is set up), the capacity of the family to manage the trust (based on the complexity of the structure) and the communication flow (how those involved in the trust will be advised of necessary information). Make sure all relevant parties understand and agree to these provisions.
  • Describe responsibilities. Isdale recommends including very specific statements in the trust documents outlining the responsibilities and specific purpose of each group/individual involved in the trust. All parties should sign an affidavit (at the time of signing the trust) acknowledging the standard of care for each group/individual.
  • Use side letters. Side letters are non-legally binding documents that enable the grantor to outline specific concerns or instructions related to the trust. Two commonly used types of side letter are: from the client to the trustee, advising of concerns related to the beneficiaries (e.g., a beneficiary who struggles with making sound financial decisions) and from the client to the beneficiaries, outlining the ways in which the grantor believes the money should be used.
  • Review the trust documents for major milestones. Taxation issues related to trusts cannot be understood and addressed in a day. If the family business anticipates a major change in the future — perhaps a merger or acquisition — the trust documents should be reviewed a year ahead to begin the pre-deal planning. A trusted and highly competent individual needs to run the numbers to ensure financial decisions are based on fact.
  • Watch for common mistakes. Not all trust-related issues are related to labyrinthine regulations. Sometime they arise from simple, but overlooked, mistakes. For example, Isdale has seen spouses and children incorrectly named in trust documents. She recommends providing the attorney with a family tree listing the full names, birthdates and addresses of pertinent family members.
  • Watch for conflicts and alignment. Each party to a trust has priorities and concerns. The grantor may view the family business as a “favorite child” and will prioritize decisions that favor the business. Beneficiaries often are frustrated when they realize they do not own the trust. The trustee may be more interested in keeping the job than in acting for the good of the trust. These needs must be recognized and kept in balance.

Much of the trust’s smooth operation depends on selecting an effective trustee. The trustee must be able to mentor the beneficiaries by building their capacity for financial literacy. One way to accomplish that is to map all the potential roles of the beneficiaries over time, identify skills required of those roles and outline ways to develop the skills. Trustees must also be prepared to defend the trust, which means they may occasionally have to take a position that opposes the views of the attorney or other advisors. This is one reason Isdale suggests not using the attorney who sets up the trust as its trustee.

Those who deal with trusts in the United States are closely following the current U.S. administration’s plans relative to estate and gift taxes. Isdale says, “I know there is talk of repeal. I am curious to know what that will look like.” She advises preparing for a variety of potential outcomes, but notes, “Basically, it’s anyone’s guess what will happen.”

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