Keys to Successful Trust Administration Part 4: Engaging the Beneficiary

Keys to Successful Trust Administration Part 4: Engaging the Beneficiary

Mission Statement, Goals, Investment & Distribution Policy Statements
Article posted in Values-Based on 9 March 2016| comments
audience: National Publication, Daniel P Felix - The Professional Trustee | last updated: 10 March 2016


Dan Felix, independent trustee, continues his re-visioning of trust administration.

By Daniel P. Felix, The Professional Trustee

Defining Successful Trust Administration

The terms “Successful” or “Effective” are not often associated with trust administration.

Many of us legal professionals implicitly agree on what’s NOT successful. Breaking the trust laws or violating the terms of a trust are two likely examples of failure. Though breaking those rules may make trust administration unsuccessful, does it necessarily follow that a trust is successful just because it follows those rules?

Financial professionals are concerned with managing and transferring a trust’s assets. Does good or excellent financial management result in a successful or effective trust? Could success come from helping the family appreciate the gift of those assets?

Some families associate negative words to the administration of their trusts, such as “burden,” “divisive,” and “destructive.” Might success include mitigating family unrest? Could effective trust administration help the family thrive more harmoniously?

And so, there’s a deep question: How do we define a successful trust? And further, who gets to participate in making that definition?

Though every trust and family is different, perhaps we can help define success by considering some known issues of trusts and trust administration that can make -- or break -- the trust. Here we consider the development and use of investment and distribution policies, along with their living context: the greater goals and mission of each trust for the family served.

Trust Goals & Policies: the opportunity for engagement

The expression of the goals of the trust by itself can provide the foundational measures for the definition of success during active administration. The process can start with the grantor, who in making the trust, might wish to consider and express the purpose and intentions behind all the technical provisions. His stated mission and prioritized goals can be a helpful directive.

Later, the trustee and beneficiary can articulate their goals, within the context of the language and law of the trust. In my experience, there has usually been latitude – sometimes great latitude – within the confines of the trust document for the trustee and beneficiary to define trust goals and policies.

The next level of goals lives in the policies for handling the financial assets. How should the money be distributed to accomplish the goals? How should the money be invested to support that distribution? If the assets are insufficient to support the hoped for goals, how are the distributions and other goals adjusted?

The greater the consensus on these visions, the greater the chance for the stakeholders to view the trust as successful. And so, the primary benefit of creating these goals and policies is the building of an invaluable consensus for the trust’s direction. In so doing, the stakeholders may become more aligned and committed to the trust’s administration.

Also, policy statements can serve as valuable guides during conflict or distress. Financial advisors know that the emotional compunction to change course may be counter-productive when the market reverses direction. With the aid of written policies, the discussion during a market reversal can be to revisit the wisdom of the investment policy. If the policy is sound, then the reversal may be more comfortably ridden out. In this way, the policy statement helps avoid fear-based (and often faulty) reactive decisions.

A similar benefit is also available from establishing and leveraging formalized distribution policy statements. Let’s say that the trust supports the trustee’s discretion in paying for the education of the beneficiaries. Let’s also presume that the trustee and the beneficiaries previously set a policy to support only the post-high school education of the beneficiaries. Budgets and investments are set accordingly.

Now given a new request to pay for expensive pre-school education, the trustee is in a position to deny that request with reasons, specifically, that the express statement of the distribution policy is to support post-high school education and not pre-school education. And so, the trustee’s “no” is couched in the “yes” to the other educational activity identified in the policy – the policy which the beneficiaries had earlier consented to.

Further, in this scenario, the request for a distribution outside the existing policy statement can be used as an invitation to revisit the policy. Perhaps the family’s evolved thinking is to lessen the focus on post-high school education in favor of pre-school. That new goal can be weighed and reconsidered, along with the financial impact. And so, they can author a new distribution policy statement.

The above scenario should be compared to the more typical scenario where the trustee simply denies the distribution request under his discretionary power. Though perfectly legal, such a decision lacks, first, the support which an agreed vision provides, and, second, the ability to salve the relationship by revisiting the policy. And so, the typical scenario is not reasonably calculated to achieve success.

In the case of Spencer v. DiCola, the trustee’s denial of payment for pre-school education was not supported by an alternative or shared vision of how she would otherwise distribute trust assets. Given the lack of an agreed distribution policy, the parties also lacked a mechanism outside of court to work through the issue. The relationship between this trustee and the beneficiary family deteriorated to the point of lawsuit and two subsequent visits to the appeals court.

This inflamed conflict is all the sadder given the fact that this family had hand-picked this trustee several years before. That the trustee’s actions were sustained as legally sufficient does not make this trust’s administration successful. While it is speculative to claim that a written distribution policy statement would have transformed this particular administration into being successful, perhaps it could have at least minimized the downside.

Developing and sharing these agreed visions and policies are important to help the family enjoy a successful trust administration, especially where “success” is defined as more than just having the money handled legally.

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