Family Office Panelists: Give Trust Beneficiaries a Voice

By:
CHRIS GAETANO
Published Date:
Apr 29, 2014

When drawing up a trust, it helps to educate beneficiaries about the process or even include them in it, as it can instill in them a sense of ownership and help them to understand why certain controls are being put into place, according to panelists at the Foundation for Accounting Education’s Family Office Conference on Feb. 5.

The discussion, moderated by NYSSCPA Family Office Committee Chair Susan R. Schoenfeld, included Barbara R. Hauser, an attorney who consults with clients on trusts; Laura M. Twomey, a partner in the personal planning department of the firm Simpson Thacher & Bartlett LLP; and Randy R. Werner, an attorney and CPA who is a loss prevention executive with the CPA insurer CAMICO. (For more tips on loss prevention from CAMICO staff, see Risk Management on page 16.)

The panelists commented that many problems that develop in the course of trust administration share one common denominator: an excessive amount of control wielded by the trustee over benefactors. For example, Hauser said that one of her first law firm clients was a 65-year-old man whose father had set up a trust for him with a 10-year staggered payout time starting at age 60. 

“He said to me, ‘I think I’m old enough to manage my own money,’” she recalled.

Another example she posed involved a billionaire client who wanted trusts drawn up so that he could control the finances of his family and their descendants for the next 300 years, which, she told surprised audience members, is indeed possible. Some states, she said, even let trusts run to 1,000 years.

For her part, Twomey said that she has encountered situations where a trust clearly did not contain enough flexibility, and the stringency of the requirements created headaches for the very people it was meant to benefit. She brought up the case of one client who is essentially his family’s patriarch, but receives income from a trust that does not allow for distributions to his children. As a result, she said, for the past 15 years, she has periodically been finding ways to enable the children to benefit from the trust within the terms of the agreement.

“That trust could have been drafted in a more flexible way to allow his life to be run [in the manner] he wanted,” Twomey said. “He is a very frugal, conservative person who has to employ lawyers constantly to get access to this money in a responsible way.” 

To help minimize these sorts of issues, Twomey recommended discussing with the trustee why they want to establish the trust to begin with—is it for tax or asset protection, or to ensure family privacy? Or is it because the trustee wants to exert some measure of control over the benefactor? Sometimes, according to Schoenfeld, it happens to be the latter.

“I saw one [trust] that had a distribution at age 70, and I remember thinking, ‘OK, there are some real control issues there,’” she said. Indeed, she added, another client, a 65-year-old grandmother, said outright, “My parents never trusted me,” when speaking of the trust she had been named the beneficiary of.   

And sometimes, as Hauser pointed out, the distrust may be aimed at a son-in-law or daughter-in-law. “I once had a client come and ask me to set up a trust for her 50-year-old daughter,” she said. “I said something like, ‘She seems old enough,’ and the client’s answer was, ‘I’ve never trusted her husband.’”

In general, Hauser felt that such levels of control are impractical and can be more trouble than they’re worth. When the trust is being drawn up, she said, it’s best for the beneficiary to somehow be included in the process. Twomey agreed, noting that doing so allows her to feel more allied with the fund, instead of feeling as if outside parameters have been imposed upon her. She added that she has discussed taking steps along those lines with her own clients, like allowing the beneficiary to be able to serve as a trustee at a certain age, or even to control the investments in the trust. This, she said, is paired with education for the beneficiary about the asset-protection benefits of the trust, such as asset protection from domestic creditors or divorce.

“I think that beneficiaries, if you educate them properly, are quite interested in the trust,” she said. “So, I love Barbara’s suggestion of involving [them] in the process so that they can get on board, understand the benefits and feel like it’s there to help them—and not because their parents didn’t trust them.” 

On the other hand, it might simply be best to steer a client down a different avenue. Hauser mentioned a client whose family had held trusts for generations. When he approached her about establishing provisions for his kids, “He said, ‘Would you be willing to rewrite this with no trusts at all for my children? I can’t stand the idea of them having to live with trusts like I have, and my father and my grandfather have,’” she related. “Not only did he not want to have trusts, but he dictated the language we put in, which was that ‘I am deliberately not creating any trusts for my children because I have the utmost confidence in their ability and maturity.’  It was lovely.”  

Click here to see more of the latest news from the NYSSCPA.