Why don't family trusts always last for generations?
It is, in fact, the moment that the settlor dies – the passing of the first generation – that determines how likely it is that the trust will last. This moment can become a crisis, not only for the trust but also for the next generation of beneficiaries and can lead to a trust being dismantled. So how do you navigate this moment successfully and make sure that your trust lasts for generations?
What motivates the next generation after the death of a settlor?
Fracturing of the nuclear family – If, as is usually the case, the settlor is a matriarch or patriarch of a family, the death of the settlor will change the dynamics of the family as well as the trust. A parent may, by force of personality, be able to hold together a family of adult children so that they still prioritise the nuclear family in which they grew up. But even if this is the case, when that parent dies, the adult children will usually prioritise the needs of their own families over those of their siblings. This doesn’t always lead to an immediate breakdown in sibling relationships, but it does mean that the next generation of beneficiaries will have different priorities and may lack a natural unifying point.
Resolving the balance of power – Having a single settlor of a trust means that, whilst that settlor remains alive, there is no need to divide power and influence between multiple parties – for example, the settlor may be the sole protector and so retain the power to appoint and remove trustees. When the settlor dies, there needs to be some arrangement that deals with the power and influence they held and how to split this amongst multiple family branches. Whether or not the settlor has put in place adequate arrangements, resolving the balance of power and influence in relation to a trust can be one of the first priorities of the next generation following a settlor’s death.
Taking a new approach – It is common for the next generation to want to put their own mark on the management of the family wealth, drawing a line under the influence of a settlor. Whilst this is not always a bad instinct, it can lead to unnecessary changes being made. More importantly, it is likely to lead to conflict between members of the next generation over the best approach to take.
What are the common sources of conflict between members of the next generation?
Changes in control – Settlors often reserve some powers over a trust, for example by acting as protector. They may also be a board member of an investment company or a private trust company, though this is less common and can have adverse tax consequences. Therefore, the death of the settlor can lead to a change in personnel in certain key roles. Where only some (or no) members of the next generation succeed the settlor in particular roles, this can cause conflict with other members of the next generation who may feel disenfranchised.
Knowledge of the structure – It may be that the next generation has very little practical knowledge of the family trust. This is most often seen in trusts where the settlor remains closely involved. On the settlor’s death, the trustees and the family advisers will typically want to educate the next generation about how family wealth is managed and what new positions or responsibilities family members may expect to hold in the future. When family members only learn about the precise nature of a family trust at this stage, and so may not fully understand the rationale behind it, this can lead to difficulties. For example, the next generation may have expected to receive assets directly.
Introduction of new advisers – The involvement of the next generation can also mean that new professional advisers (e.g. lawyers, accountants or family consultants) are involved. New advisers can be a force for good, bringing a fresh approach to the management of family wealth. However, there is often value in the “institutional memory” existing advisors can have, and ideally existing advisors would work together with new advisors to achieve a common goal.
How can trustees and advisers minimise the chance of conflict arising?
The steps that can be taken to minimise the chance of conflict arising following the death of a settlor are not particularly complicated or surprising. What makes them difficult to implement, however, is the fact that they generally rely on the settlor wanting to take them.
Settlors should talk to the next generation directly – Although it may not always be appropriate, the best way of minimising the chance of conflict arising is for a settlor to discuss with the next generation (i) what will happen after the settlor’s death, (ii) how power and influence will be delineated and, most importantly, (iii) why the settlor has chosen to arrange matters in that way. This limits the possibility that members of the next generation will disagree about what a settlor may or may not have wanted to happen, which can become a significant source of conflict.
Define the role that the next generation will be expected to play – Whether it be memorialised in a letter of wishes, a family constitution or the trust instruments themselves, carefully defining the role that the next generation will be expected to play in relation to a trust is a vital exercise and may prevent disagreements arising later. It should complement, rather than replace, the settlor talking to the next generation directly.
Introduce the next generation to the trust and the family’s advisers early – Educating the next generation about a family trust more generally can help minimise the disruption caused by the death of a settlor. Introducing the next generation to the trustees and key advisers early and involving them in, for example, the interview process to replace key personnel from time to time can help members of the next generation feel invested in the structure and help establish key relationships early. It should also help prevent the instinct to replace all the existing advisors, which may be tempting if the next generation have no relationship with them.
Don’t be afraid to restructure if necessary – Trusts are inherently flexible. Sometimes, the best thing to do after a settlor dies is to sub-divide or partition a trust to allow beneficiaries to have a degree of autonomy over their respective interest. Whether or not this will be possible (or desirable) will largely depend on the nature of the trust assets. For example, liquid investments are easier to divide than a controlling interest in a private company, although there are ways of dividing ownership and control of any asset. Ultimately, trusts must adapt to changing beneficiary circumstances in order to survive.
This article was first published by ThoughtLeaders4 Private Client Magazine.