Trusts: Keeping Up With the Modern Family

Take-Away: Today’s trust instruments need to contain greater flexibility and thoughtful definitions to guide a trustee that must deal with the needs and desires of the ‘modern family.’

Overview: The long-running  comedy TV show ‘Modern Family’ showed to us just how different contemporary families appear and act when compared to what we normally assume to be a traditional family setting. The problem for a trustee is that a ‘traditionalist’ born in the 1940s or 1950s will have their attorney draft their trust with a ‘traditional’ family’s needs and dynamics in mind. Yet the trustee must administer that same trust for its beneficiaries in a much different world than what the settlor (and his or her trust) envisioned. A recent article by R. Hugh Magill provided some eye-opening demographics and statistics that suggest that the current American family is anything but ‘traditional,’ and those of us who counsel settlors need to ask some tough questions to make sure that the settlor’s trust will actually accommodate the needs and lifestyles of its beneficiaries.

Longevity Increases: It is no surprise that we are living longer. The average female life expectancy is 81.1 years, and for males it is age 76.1. For those individuals who enjoy more wealth (and thus who are more likely to adopt a trust to distribute their wealth) at age 50, a female’s life expectancy is age 91.1 years, and for a male 88.8 years. Add to that increase in life expectancies the current planning strategy to avoid the generation skipping transfer tax by creating a dynasty trust that is designed to last for several generations of beneficiaries and you have new challenges. The trust remainder beneficiaries may have to wait a long time, and they will be much older, before they can expect to receive a distribution from the trust. If a dynasty trust is created, the trustee will have to be even more vigilant in making prudent investments that must provide for these much longer life expectancies. Additionally, as the generations pass, the group of potential beneficiaries of a dynasty trust will probably grow exponentially in size.

Questions: Would a discretionary income-spray provision make much sense if there are over 100 current trust beneficiaries of a dynasty trust? Should the trustee be given the authority to divide or decant a dynasty trust’s assets along family lines without the need for a court order?

Marriage Declines: In the 1950’s, married couples comprised close to 80% of American households. Today, that number is less than 50%. The fastest growing segment of the American household population is unmarried, heterosexual couples. This is for both young and old adults. In 1960, 59% of young adults were married before age 29; today, only 18% below that age are married. The number of older Americans who cohabit without marriage increased 75% in just the last 10 years. Twenty-six percent of American children are now raised in a single parent household.

Questions: If a trust instrument directs the trustee ‘shall distribute all income, but no principal,’ will that be sufficient to sustain a single-parent household? Would the ability of the trustee to convert the trust to a unitrust be more responsive to the needs of the single-parent trust beneficiary? Should an extended period of cohabitation by a trust beneficiary be treated as a marriage to a spouse by the trustee for purposes of the exercise of a limited power of appointment to a appointee class that consists of ‘descendants and ‘spouses?’

Same-Sex Marriages Increase: While heterosexual marriage may be on the decline, at the same time we now have legal same-sex marriages, with all of the rights that extend to a surviving spouse. [There are over 1,138 provisions in federal laws that treat the relationship between two married individuals differently from any other relationship.]

Questions: How does a trustee interpret a power of appointment that gives the beneficiary-donee the ability to appoint trust assets to the donee’s ‘husband or wife?’ Should ‘husband and wife’ in a trust instrument  be changed to ‘spouse?’  Will a non-marriage civil union authorized in some states, or a certified domestic partnership in other states be treated as a ‘lawful marriage?’

Fertility Declines: In recent years the U.S. fertility rate has modestly dropped. Back in the 1950’s the typical American household had three children. The most common household today is that of a single individual, followed by a married couple, next a married couple with one child, and only then a married couple with two children.

Question: Should a trust instrument focus more on alternate successor remainder beneficiaries, if there is a stronger chance that there will be no ‘issue or descendants’ of a current beneficiary?

Divorce Increases: Contrary to the prior generation, Baby Boomers find little social stigma associated with a divorce. Forty-two million American adults have been married more than once.  A surprising study of divorced individuals notes that they have the highest rates of intestacy in the U.S. The Health and Retirement Study at the University of Michigan (2017) determined that while the general intestacy rate among older (age 50 and up) Americans is 42%, among divorced adults the intestacy rate is at 62%.

Question: While giving a trust beneficiary a power of appointment in order to add flexibility to the ultimate distribution of trust assets, that assumes that the beneficiary will actually exercise the power of appointment in a Will or other written instrument. If the beneficiary is divorced, is there is a much greater likelihood that the power of appointment will never be exercised?

Blended Families Increase: As a result of more divorces, there are far more remarriages than in previous generations, which results in many more blended families. One out of six American children now grow up in a blended family. 40% of Americans have at least one step-relative. Forty-two million Americans have been married more than once. The increase in divorce and blended families has also led to new household phenomena like ‘three parent families,” and the liberalization of custody laws where a second spouse may be granted parental rights. Some states even recognize a third parent as a de facto parent. The same goes with more expansive adoptive rights. For example, Section 613 of the Revised Uniform Parentage Act authorizes the third parent to adopt a child without the former spouse/biological parent being required to relinquish their parental rights.

Questions: Should a trust instrument contemplate that there might be more than two parents of a ‘child?’ Should a trustee be required to consider the support obligation of a third parent when making discretionary distributions to a minor child-beneficiary? Does an ‘income spray’ provision in a trust make much sense when the beneficiaries are part of a blended family?

Assisted Reproductive Rights: With the advent of assisted reproductive technologies, more children will be born outside of traditional family structures. Consider an elective single-parent family. I ran across a new term in this regard, a concept calling dibling families. Apparently in dibling (donor-sibling) families, children of the same male genetic donor, but different mothers, are raised in settings where they know and interact with each other and their genetic father. [This was the premise of the popular film 10 years ago, “The Kids Are All Right.]”

Questions: In a trust class gift to the beneficiary and his/her siblings, will that class also be expansive to cover a dibling? Will a class gift to ‘my children’ include child born posthumously long after the father’s death?

Sexual Identity: States are starting to legally recognize sexual-identity as a civil right. Thus, we see more individuals who publically identify with a different gender, or in some cases, no gender at all.

Question: Should a trust instrument provide in its definitions that references to he and she shall also include individuals who consider themselves gender-neutral or who have elected to have their gender altered?

The most recent U.S. Census data (U.S. Census Bureau, “American Families and Living Arrangements,”, 2013) indicate that 31% of American households are without any children. 35% are ‘traditional’ families (heterosexual, married and with children) and 34% are ‘modern families’ (blended, multi-generational, same-sex, and single parent.) These statistics indicate that a trustee’s fiduciary duty of impartiality will be severely tested with a disparate set of beneficiaries in the same trust.

Example: Consider the trustee’s duty to communicate and account to both the current and remainder beneficiaries with regard to the trust’s administration, beneficiaries with dramatically different lifestyles, and expectations and not much cohesiveness. Do children from the husband’s first marriage resent his surviving spouse, or sue the trustee, who is not much older than his children, who view any trust distributions to the widow as a depletion of their ultimate inheritance?

Conclusion: The lives contemporary beneficiaries lead and the manner in which they form relationships and establish ‘families’ may not reflect the patterns contemplated by the settlor when the trust was established. Thus, the age-old balancing act of a trustee, to carry out the settlor’s intent balanced against the obligation to administer the trust for the benefit of the beneficiaries. Adding some expansive definitions will help guide the trustee in this task.