A Beneficiary’s Well-Being:
A New Approach to Trusts

Delaware has long been recognized as a leading jurisdiction in which to establish a trust. Delaware regularly creates laws that are intended to conduct a trust creator’s intentions while promoting flexibility in the administration of a trust that might continue for hundreds of years. Moreover, Delaware’s Chancery Courts are highly respected in their knowledge and understanding of how trusts are administered and will hold trustees accountable when they serve trust beneficiaries. It should come as no surprise then that in 2024 Delaware again took the lead to create the first Beneficiary Well-Being Trust Act. [12 Del.Chancery Section 3345(b).]

To state the obvious, many trusts are created from a restrictive perspective, where the trust is designed to protect a beneficiary from the perceived negative impact of inheriting wealth, either by limiting access to the assets held in the trust, e.g. the beneficiary is viewed as a spendthrift or substance abuser, or restricting access to information about the trust out of a fear that the beneficiary will not become self-reliance, e.g. they will become a trust fund baby. [A recent example is Michigan’s recently adopted silent trust statute which authorizes a trustee to not tell the beneficiary about the existence of the trust or its assets for potentially a couple of decades.]

Delaware’s new well-being statute goes in the opposite direction. It creates an approach where a trust is used as a financial resource to pay expenses that are designed to prepare the trust beneficiary for the challenges of inherited wealth, to encourage, fiscal responsibility, and to promote what it describes as the beneficiary’s psychological well-being. Delaware’s well-being statute is intended to support, rather than inhibit, a beneficiary’s engagement, education, understanding of family history, family dynamics, transparency, and ultimately the beneficiary’s well-being.

Existing trusts can ‘opt in’ to this new statutory regime, regardless of the trust’s terms. New trusts can expressly adopt this authorized beneficiary well-being approach, where a trust beneficiary is given the right to receive and participate in well-being programs as part of their interest under the trust and the trustee is expressly empowered to spend trust assets to create, provide and monitor the well-being programs designed for the trust beneficiary.

The well-being statute authorizes the trustee, through frequent communication with the trust beneficiary, to create what constitutes well-being programs that include: seminars, courses, programs, workshops, counselors, personal coaches, short-term university programs, group or one-on-one meetings, counseling, family retreats and reunions, and customized programs that are designed to engage the trust beneficiary to better understand the beneficiary’s challenges and responsibilities regarding wealth. The statute’s goal is that through direct and frequent communication with the trust beneficiary the trustee will review the beneficiary’s progress, life goals, and assess his/her wealth consumption, financial literacy, and money management skills.

The well-being statute gives the power to the trustee: “to provide financial and education services to the beneficiaries either individually, or as a group, regarding multi-generational asset transfers, developing wealth management and money skills, financial literacy and acumen, business fundamentals, entrepreneurship, personal financial growth, knowledge of family businesses, and philanthropy, and/or educate beneficiaries about the beneficiaries’ family history, family’s values, family governance, and connection among family members.”

One common reality about an estate planning trust is that the trustee usually only has a relationship with the individual who creates the trust. When it comes time for the trustee to interact with trust beneficiaries, usually on the trust creator’s death, the trustee is often replaced with a successor trustee that has minimal or a total lack of a relationship between the trustee and the trust beneficiaries. With a beneficiary well-being trust there must be communication between the trustee and trust beneficiary to identify what is necessary by way of programs or counselors, or some other type of education to assure the beneficiary’s ultimate well-being. Consequently, the hope is that a trusted relationship will extend beyond the trustee-trust creator to include the trust beneficiary.

The philosophy behind a well-being trust is that it will promote a sense of psychological well-being in the beneficiary. Behind that is what is known in psychology circles as the ‘self-determination theory’ of psychological well-being, which attributes an individual’s mental health to three separate human behaviors: autonomy (the ability to exert personal agency over one’s life), relatedness (the ability to be in a relationship in a productive social system,) and competence (skills that improve efficiency and performance to complete a task.) A well-being trust is thus intended to support, rather than inhibit, these three human behaviors. More than using a trust as a legal structure that focuses exclusively on preserving and protecting financial wealth, it shifts the purpose of the trust to a source of wealth that can support not only the beneficiary’s financial needs but also provides the tools that are critical to sustain the trust beneficiary’s well-being throughout each phase of that beneficiary’s life.

There are, to be expected, some unanswered questions about how a well-being trust functions and is taxed.

One question is whether the expenses incurred by the trustee to create, provide and monitor a well-being program for the trust beneficiary is a taxable distribution to the beneficiary or a non-taxable administrative expense incurred by the trust. The Delaware statute which directs the trustee to pay these expenses (‘the trustee shall pay”) and it classifies these expenses as ‘administrative expenses of the trust.’ The answer to this first question will turn on whether the trustee considers the expenditure as ‘necessary and appropriate to carry out the trust’s stated purpose.’ If the trustee determines that a well-being program is an administrative expense, then it would not be considered a taxable distribution to the trust beneficiary.

Yet a second question deals with the tax deductibility of the well-being expenses that the trust incurs. Federal tax law provides that a trust’s administrative expense which would not have been incurred if the property were not held in the trust, is fully deductible by the trust. In other words, an expense is not deductible by the trust if the expense is unrelated to the trust’s administration. [IRC 67(e).] No doubt the IRS will soon get involved in answering this question if well-being trusts become popular estate planning devices.

Delaware’s Beneficiary Well-Being Trust is a new way to look at how a trust can be used to help trust beneficiaries thrive as they move through their life stages to prepare them for the joys and responsibilities of wealth. While questions remain about how those well-being expenses will be taxed, or even if those expenses are deductible by the trust, a well-being trust may provide a fresh approach to how wealth is inherited.