An Introduction to Beneficiary Well-Being Trusts
A new concept is being introduced within the estate planning world known as the “well-being trust.” These trusts are not primarily focused on achieving favorable tax or estate planning objectives, nor the preservation of family wealth, but rather, as the name suggests, are focused on assisting in the development of long-term happiness and well-being in the lives of their beneficiaries.
Utilizing research from positive psychology and well-being science, these trusts are established to purposefully improve the lives of beneficiaries and help them develop a positive relationship with wealth. While in many cases these trusts are being created through the inclusion of well-being language, there are some states looking to create a statutory method of applying the concept to existing trusts through the use of additional statutory trustee powers.
Traditional Trust Shortcomings
There are several shortcomings found in the traditional trust model that well-being trusts are intended to address.
Primary amongst them is the somewhat rigid distribution standards commonly utilized. Traditional trusts include what is referred to as the HEMS standard for the guideline applied to beneficiary distribution discretion, or health, education, maintenance and support. This standard is referred to as the ascertainable standard amongst practitioners as it is objective in nature with a vast history of case law interpreting it, in addition to a body of IRS findings, determining it to sufficiently exclude trust assets from the beneficiary’s estate. While the result of its use is the ability to yield predictable outcomes for beneficiaries, its objective nature often does not allow for the subjective analysis or flexibility needed for a trustee to make distribution decisions that are more individualized in nature.
Other shortcomings of traditional trusts include the application of objective incentive provisions, which attempt to find a one-size-fits-all approach to ensuring that the trust beneficiaries do not allow their inherited wealth to stifle productivity and motivation. The application of incentive clauses often results in the scrutinization of beneficiary lifestyle choices. While not intended by the settlor of the trust, this is the result of trustees’ attempts to equitably apply these restrictions.
As part of its duty of impartiality, a trustee is required to exercise its discretion powers in a manner that is both consistent amongst beneficiaries and applies to the best interest of all beneficiaries as a whole. Ironically, the result is often inequitable, measuring productivity in dollars rather than impact on the world. Those in lower paying professions such as teachers often make an equal, if not more significant, impact on the world around them. In addition, provisions such as those requiring the consideration of other resources available to a beneficiary prior to receipt of a distribution can disincentive financially independent beneficiaries.
Another aspect of traditional trusts is the use of silent trust provisions. Meant to safeguard beneficiaries from the knowledge of the family’s substantial wealth, these trusts delay notification of the wealth held in the trusts, and their right to inherit the same, to these beneficiaries until adulthood.
In delaying notification, the settlors of these trusts are hoping that beneficiaries will be able to chart their own courses without the burdens of wealth. While they may benefit from growing up without that burden, these beneficiaries are also denied the advantage of an education in the areas of financial literacy, including topics like savings, wealth planning, and philanthropy.
The Well-Being Trust
The goal of the well-being trust is to address these shortcomings of the traditional trust model. Through thoughtful guidance from the settlor via precatory language within the trust instrument or a letter of wishes and broad discretionary powers, these trusts attempt to allow trustees greater flexibility in exercising discretionary distribution authority.
With a goal of educating rather than controlling beneficiaries, the well-being trust is focused on helping the rising generation develop a positive relationship with money, feeling empowered and heard, and learning to appreciate their own potential. Many of the provisions included in these trusts include language acknowledging the advantages to passing wealth through generations, such as tax savings, creditor protection, consolidated investment management, and protecting assets from imprudent waste.
These trusts specifically authorize the trustee to engage trained professionals to enhance beneficiary well-being through education. This includes helping beneficiaries to find their own path and purpose in life, teaching them to be charitable with their time and resources, and showing them what that looks like and how to have the biggest impact. Included in these trusts are provisions providing for education in several key areas, including:
- Providing multi-generational estate and asset planning assistance
- Development of wealth management and money skills, also known as financial literacy
- Understanding and creating a purposeful plan of philanthropy
- Providing basic financial support including the costs of health and education to enable beneficiaries to achieve their personal goals
- Understanding of the family business and trust structures
- Educating beneficiaries about the settlor’s family history, legacy, dynamics, family values, family governance, and connection among family members
- Participating in seminars, courses, programs, workshops, counselors, personal coaches, short-term university programs, one-on-one meetings and counseling
- Facilitating and hosting family meetings, family retreats, family reunions, and custom programs designed to improve family dynamics and growth
- Discussing wealth management and responsible wealth consumption, as well as how to access their wealth
To affect this education, these trusts expressly provide that the costs of these additional services are to be paid at the expense of the trust according to the regularly published fee schedule of the providers. They also typically provide that the trustee may provide these services themselves, and that in doing so is entitled to similar compensation over and above its compensation for fiduciary services. This allows the trustee to engage more regularly and more deeply with the trust beneficiaries, which is a win for both.
To give maximum effect to these provisions, settlors also typically include language encouraging the trustee and any other fiduciaries to personally engage with beneficiaries. This engagement often takes the form of regular meetings with each beneficiary and the development of familiarity with the beneficiary, his or her family, and their individual needs and wealth plans. Settlors recognize that there may be an increased cost associated with this increased engagement and as noted previously, specifically agree that the trustee should receive increased compensation.
Well-Being Trusts are a good step in the direction of increasing beneficiary engagement and education. They address the need for a relationship amongst the parties to the trust, started early so that the transition of family wealth can occur more smoothly and deliberately.
More than just a financial arrangement, these trusts call for regular interaction and responsible education of the beneficiaries with the hope that they will allow the trust to serve as a catalyst for a purposeful and meaningful life. It allows beneficiaries to make decisions rather than allowing others to create their paths and determine what is important to them. In the end, the goal is to create happy, responsible, and engaged beneficiaries, resulting in the continuation of family legacy with a modern day twist.
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.