Bridging the Knowledge Gap: Educational Strategies for Beneficiaries of Silent Trusts
While for many years now families have embraced the concept of silent trusts, some twenty years later we are discovering that these quiet trusts have left an audible void in the transfer of generational wealth. For years the focus has been on protecting beneficiaries from the pressures and negative consequences of wealth through delayed notice. While these beneficiaries may have been able to grow up without the burdens associated with wealth, they are now finding that the result is a generation of individuals who have not had the benefit of the financial education needed to understand how to be good stewards of their inherited wealth.
The Problem
In the early 2000’s a new planning technique was developed for settlors who wanted to engage in estate planning but were hesitant to provide too much information about their personal wealth to trust beneficiaries. This hesitation was derived from a concern that providing too much information to beneficiaries too early in the process before the settlors intended for distributions to be made or at too early an age would cause beneficiaries to become either too reliant on the funds or too involved in the settlors’ personal finances.
Additionally, many settlors with younger beneficiaries were concerned that knowledge of familial wealth might lead to lazy and unproductive children. Even more frightening to most settlors was the concern that having an understanding of the family’s wealth and the corresponding responsibilities associated with that wealth may place too large a burden on beneficiaries at too early an age.
The result of these concerns was the development of silent or quiet trusts. By design these trusts allowed settlors to delay knowledge of the trust, its terms, and its assets for a period of time. To keep the planning balanced, that period of time was required to be tied to something that was certain to occur like the death of a particular individual, attainment of a certain age, or the expiration of a set term of years.
While effective in delaying the burdens of wealth, it quickly became apparent that someone needed to be acting for these beneficiaries during this silent period. There was a clear need for someone to stand in the place of the beneficiary to receive information, oversee the trustee’s activities, and enforce the beneficiaries’ rights. A designated representative role was created for this purpose. The role of the designated representatives may vary, but typically most include the ability to request distributions on behalf of a beneficiary, receive tax information and statements, review and execute trustee releases and trust modifications, and take any necessary legal actions to enforce the rights of the beneficiaries whom they represent.
The addition of designated representatives did help bridge the gap between silent trusts and the concerns that there would always be someone able to enforce that beneficiary’s rights, there still remains a gap. A truly silent trust can delay valuable teaching moments which help the next generation learn how to relate to familial wealth.
The Solution: Beneficiary Engagement
Today, many families are learning from the shortcomings of silent trusts and looking to engage the rising generations in educational opportunities regarding the responsibilities of wealth and the best ways to understand financial planning and how to effectively engage in philanthropy.
This engagement can start at a fairly young age with basic financial and social awareness and grow over time into each beneficiary finding their own place within the family governance structure. The key is a three-part process involving (1) meaningful communication and transparency, (2) varied learning formats and opportunities, and (3) encouraging direct involvement and mentoring.
1. Providing Educational Opportunities
Families have begun to develop intentional educational opportunities at an early age. As early as age 5, a child can understand the growth cycle of plants enough to appreciate the comparable growth cycles associated with money and the basic factors that can affect that growth. Organizations such as the Delaware Financial Education Alliance have even created a book series called “The Great Investo” which help teach children how to save, about the impact of interest, and other financial educational topics.
As children continue to grow, so can the lessons and their complexities. The important thing is to involve them and make wealth a part of their lives from an early age, creating appropriate levels of transparency and shared accountability along the way. This continued dialogue can help a family to create a feeling of common purpose that helps the younger generation to see how decisions affect their wealth and ability to achieve that common purpose.
It is also important to create opportunities for education using a variety of formats. There are many different learning styles, and a good educational program should include opportunities that are a combination of hands-on training, casual conversation, visual presentations, and even podcasts. In this way, families can address different learning styles to encourage beneficiaries to find the style that best fits them. It is also important to offer opportunities for independent learning through mediums such as podcasts.
Some trustees are also developing portals with educational materials aimed at differing levels of knowledge including the basics, intermediary and advance trust planning techniques. Other trustees have begun developing forums for beneficiaries in the rising generation to interact with each other, share common experiences, and address individual questions.
In addition, with the onset of well-being trusts, trustees will be spending more time developing materials and training programs to help support beneficiary education. It is important to remain aware of what opportunities are available and to utilize both internal and external resources to educate and nurture the rising generation.
2. Creating Meaningful Communication and Age-Appropriate Transparency
Providing age-appropriate communication and transparency is also an important part of engaging the rising generation. Things as simple as sharing family history can be a great foundation for learning about family wealth and opportunities. Including children in service opportunities and allowing them to select causes that are important to them can be helpful in allowing younger beneficiaries to understand how to effect social change. Involvement in charitable events, even as simple as a 5K run for charity can help teach younger beneficiaries about the simple ways they can make a difference in their world.
In addition, as children age, creating opportunities for conversations about budgeting, investing, and family values can help prepare children for understanding and relating to familial wealth. Open communication about each other’s motivations and value systems can also help. At the appropriate time, it can be helpful to share family financial statements (without numbers or specifics) with beneficiaries to make them comfortable looking at them, understanding them, and analyzing what they mean. Over time, additional information can be added to the statements to make them more meaningful.
It is important in this process to ensure that families are recognizing that each individual has a different perspective and that individual values may vary from person to person. This individual identity should be nurtured throughout the process, even encouraged. Recognizing individual strengths and possibilities for contribution are key to engaging and successfully incorporating the rising generation into the purposeful management and use of family wealth.
3. Encouraging Involvement
A final vital part of engagement is encouraging the younger generation to participate in family events and meetings in a variety of ways. The most successful families that we work with involve the next generation in conversations about the existing wealth plan early. They engage in conversations about the “what and the why” of their planning to help them to understand what currently exists and how they are intended to interact with trustees, financial planners, charities, and each other. Setting expectations, providing opportunities for the beneficiaries to interact with the existing team, and the ability to learn over time are key to allowing beneficiaries to become engaged.
Creating opportunities for the rising generation to participate in the family business or other family matters is also a means of creating engagement. It is important to acknowledge each family member’s unique gifts and circumstances by creating a variety of opportunities. For instance, families can create summer internships to connect younger family members to the family business. Including a member of the rising generation on planning committees for events such as family meetings can also be a means of engagement and training.
Some members of the rising generation may prefer an active role in the family’s charitable program and enjoy actively volunteering either with the charity itself or with charitable grant beneficiaries. Matching beneficiaries who do not have an interest in the family business with mentors comprised of like-minded, more senior family members can also provide opportunities for engagement. Through mentorship, younger family members can gain an understanding of what opportunities are available to them to participate in family governance by providing a more senior person to help them develop skills, confide in, and perhaps help in career development even outside of the family business.
Inviting members of the rising generation to advisory meetings regarding investments, philanthropy, and estate planning can promote discussions and questions, which ultimately lead to fostering trust amongst all of the generations. Regular annual meetings with trustees in which family members discuss what they are currently doing, how the trusts can assist, and family values can also be an important part of family engagement. Starting the process early, while the settlors can participate, is key to a smooth future transition of trustee relationships and education.
From a very practical perspective, creating things like a family foundation and allowing the next generation to participate in meetings, become board members, and see how the process works can be quite helpful. The children of the wealth creators are often fearful of failure or not living up to the expectations of successful parents, so helping them to find their own path and develop their own strengths can help create a more positive experience. Including the rising generation in family governance also has the added benefit of ensuring that the topics discussed, methods of presentation, and issues addressed remain relevant to all generations.
Achieving Success
Ultimately, success is having a family that understands its history, the goals each member hopes to achieve with wealth, the role that each member will play in support of the family, and how each piece fits into the larger family tapestry. It is never too late to start or too early to start financial education. The important piece is to make sure that whatever process you choose, it is age-appropriate, involves a variety of personalized training opportunities, and is collaborative in nature. Encouraging transparency wherever possible will encourage trust and provide a good foundation for the family to prosper, both financially and emotionally.
Commonwealth Trust Company is pleased to provide this article as a guide. Commonwealth Trust Company is not engaged in the practice of law and is not providing legal advice by the provision of these materials. Commonwealth Trust Company recommends that clients seek the opinion of their attorney regarding the specific legal and tax issues addressed in this article.