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Don't Leave Your Beneficiaries in the Dark

By Darlene R. Dahl, CPA/PFS, AEP®, CDFA®

Family trustees often struggle with balancing their fiduciary duty of informing younger beneficiaries about trusts established for their benefit with their concern that the information would distract them from the experiences of learning, earning a living, and establishing their own independence.

A powerful first step in communicating with beneficiaries is focusing on the family’s legacy. A family’s legacy is about much more than the money.  It includes the family’s history, beliefs, stories, experiences, and values.  Often, families will produce personal videos or memorialize their story, intent, and wishes in a letter to the beneficiaries.  They share the reasons for establishing the trust and their expectations on how the trust will benefit the family.  Wishes might include strengthening family members, their relationships, and making an impact in the world instead of vastly improving one’s current standard of living.  Other families might encourage working hard, living within one’s means, investing prudently, and giving generously of one’s time and money.

In addition to sharing intentions with their family, videos and letters often provide the independent, or successor trustees, helpful insight when fulfilling their fiduciary duties years down the road. While the trustees must first look to the trust provisions, additional instructions are especially helpful if trusts were drafted with the flexibility to meet the changing needs and life events that families experience over time.

Families also draft distribution guidelines to help set expectations with the beneficiaries around what distributions they can request from the trust. The guidelines can also address whether or not the trustees should take the beneficiary’s other assets and sources of income into account when approving distributions.

Family meetings, or educational sessions, are effective ways to communicate with multiple generations. The initial session may be as simple as explaining what a trust is, its purpose, and how it functions over time. Other discussions might address who the various parties are to the trust, how distributions are processed, certain tax filing requirements, or why trusts are established.  On-going trustee communication includes providing an annual report on the trust’s holdings, activity for the year, and investment performance.  Similar to many states, the Massachusetts Uniform Trust Code requires trustees keep beneficiaries reasonably informed once they reach the age of eighteen.  It is the duty of the trustees to protect the interests of the young beneficiaries and to provide enough information so that they are able to make additional inquires if they want.

Families are often very concerned about disclosing the amount of monies held in trust without providing the guidance and insight the younger beneficiaries need to put things in perspective. It is important that they understand that trusts create a “fiduciary” relationship in which the trustee must administer the trust in accordance with the trust terms for the benefit of all of the beneficiaries.  Since trusts benefit both current and future beneficiaries, they need to realize that trusts are depleted as the number of beneficiaries multiplies with each generation.  Helping the younger beneficiaries understand how aggressively they spend down the funds will determine whether or not funds might be available for their children or grandchildren in the future.  Financial projections can help illustrate how quickly the trust might or might not be spent down based on current and expected future distributions.

Trustees should develop a healthy working relationship with the beneficiaries. Taking the time to educate beneficiaries, getting to know them, and understanding their needs, are important in making sure the distributions are made in the beneficiary’s best interest.

Families that model gratitude for their financial wealth, work with the younger generations to install financial knowledge, and reflect on their shared values help each successive generation better understand their obligations to the family and the family’s financial capital. When first and second generations become actively involved they provide the younger beneficiaries with valuable insight.  They can help the Trustees explain why the trusts were established and how they were intended to benefit family members.  Once the beneficiaries better understand their role and the role trustees play in protecting their interests in the trusts, the beneficiaries hopefully see the trusts as a gift of amazing resource instead of a burden or obstacle standing in their way.

Print version: Don’t Leave Your Beneficiaries in the Dark