Dead Hand or Helping Hand

The approach to, and philosophy behind, estate planning seems to be headed in a different direction these days, a concept informally called Wealth 3.0.

Several decades ago, when I first started to practice law, estate planning often involved the use of trusts where the beneficiary was given the right to receive income for life. This was informally called Wealth 1.0. As the decades passed, and the amount of wealth expected to be held in trust increased, coupled with states loosening their rules on how long a trust relationship could exist to attract trust ‘business’, more trusts began to be drafted as discretionary trusts where the trustee possessed the discretion to distribute income, or principal, to or for the beneficiary. This change in approach with discretionary trusts was called Wealth 2.0

Often the focus of Wealth 2.0 focused on a negative, a fear-based approach, where the trust’s creator believed that too much wealth could deter the beneficiary from the pursuit of a positive and productive lifestyle. This concern, reflected in the trust’s terms was often expressed as the fear of creating a ‘trust fund baby.’ This fear then began to manifest itself with dynasty trusts (where assets were held in trust almost in perpetuity) an interest in silent trusts (where the beneficiary is kept in the dark regarding either the trust’s existence or the amount of assets held in the trust for the beneficiary) or where the trustee fully controlled the beneficiary’s access to the trust’s assets (to shield the trust assets from claims of creditors or divorcing spouses.) The philosophy behind Wealth 2.0 was, ‘the less the beneficiary knows about the trust, the less likely it is that the presence of the trust will do damage to the beneficiary’s growth and financial maturity.’

Unfortunately, this fear-based approach to estate planning, often referred to as the trust creator’s dead hand which controls the assets held in trust long after the creator is in the grave, seemed to predominate the approach to estate planning in the latter half of the 20th century and earlier into the 21st century. Many observed that this fear-based, control over inherited wealth through the restrictive terms of the trust often kept the beneficiary in an arrested stage of development, with little incentive (or opportunity) to learn about trust resources and little ability to gain personal control over his or her own life. Wealth 2.0 thus focused on over-protection rather than possibility, secrecy over transparency, and control over communication.

With that history, there is now a growing consensus that we may be entering into a new age of estate planning, often called Wealth 3.0, which focuses not on the fear of what damage extraordinary amounts of wealth might do to a beneficiary to destroy his or her personal growth, but how such wealth should be centered on the trust beneficiary’s growth and well-being. Rather than focus on the wealth creator’s fears of the impact of their wealth on their beneficiary, the focus instead turns to the positive impact that wealth can have to create the beneficiary’s learning, skills, and growth opportunities to promote the beneficiary’s active engagement with the assets held in their trust.

Families (and now their advisors) are challenged to discard the fear-based approach to estate planning of the past, and to recognize that wealth, in and of itself, does not corrupt, but can be used effectively to engage trust beneficiaries to enable them to live a thriving life. The question then becomes: How will a trust beneficiary feel empowered if they perpetually live under the creator’s dead hand?

Wealth 3.0 seeks to focus on the role of the beneficiary’s personal and skill development as the central goal of the estate planning trust, by using wealth as a vehicle to learn, or to intentionally create conditions where the trust beneficiary can thrive with the wealth held in the trust. Succinctly stated, Wealth 3.0 supports, rather than inhibits, the beneficiary’s engagement, education, and growth, with the goal of creating conditions where the beneficiary can thrive with wealth.

When discussing the potential terms of a trust, rather than identify fears about how substantial wealth might harm the intended beneficiary, that discussion instead focuses on how the trust’s creator envisions the trust will positively impact the beneficiary’s life and how the creator would like the trust to meet that goal without exclusively focusing on tax planning. Some suggestions to implement this new Wealth 3.0 approach with trusts include giving the trustee the following tools:

1. Create a board of advisors to guide the beneficiary’s learning and development;
2. Implement ‘earned independence’ in the trust, where at each designated stage, if the beneficiary can demonstrate an increased responsibility, the beneficiary can earn increased autonomy;
3. Enable the beneficiary to become a co-trustee upon certain attained conditions or events, where the beneficiary can gain experience more about the trust and responsibility over the trust’s income and assets;
4. Authorize the trustee to hire others to provide beneficiary well-being programs and expressly make these costs an authorized trust expense;
5. Authorize the trustee to hire professionals to provide counseling, ‘personal coaches,’ or financial planning and budgeting training, or to create an awareness of philanthropy; and
6. Add provisions to the trust instrument to intentionally foster communication and connection, rather than silence, secrecy, and isolation (which often breed resentment in the trust beneficiary.)

Anyone who creates a trust wants to improve the life of the trust beneficiary. Rather than focus on fears of what that wealth might do to stunt the beneficiary’s growth, Wealth 3.0 purports to focus on how that inherited wealth can open new doors, create new opportunities for the beneficiary to succeed, and provide the beneficiary a positive sense of self-worth.

Is Wealth 3.0 simply a ‘flash-in-the-pan’? Who knows for sure. What we do know is that often the dead hand approach to a trust produces resentment and a passive approach to engagement with the trustee. Wealth 3.0 seeks to give trust beneficiaries a helping hand.

For further reading on Wealth 3.0, see:

James Grubman, Dennis Jaffe, and Kristin Keffeler, “Wealth 3.0: From Fear to Engagement for Families,” Trusts & Estates, (February 2023).

Nike Anani, Todd A. Flubacher, Kristin Keffeler, and Philp J. Hayes, “Letting Go of the Dead Hand: Part II.” Trusts & Estates, (March 2024).