Dealing with Sudden Wealth

It is your wealth and you should be able to leave it to whomever you want on your death and in whatever fashion you consider appropriate. Most individuals intend that the purpose of their wealth, often transmitted by a trust, is to enhance the lives of their trust’s beneficiaries. Estate planning, however, focuses on when and how that wealth is transferred to beneficiaries. Far less time is devoted to the probable impact of that transmitted wealth on beneficiaries. More time needs to be spent to assess how that wealth will actually be used to make a beneficiary’s life better: which entails some reflection on the beneficiary as an individual, not just a ‘wealth recipient.’

Frequently there lingers the anxiety that leaving too much wealth to beneficiaries outright may have the complete opposite effect to diminish the lives of those beneficiaries. Often expressed is the worry that the beneficiaries of that wealth will lead dissolute lives. If a trust holds and transfers an inheritance, the concern is that the beneficiaries will become ‘remittance addicted’ to monthly trust distributions that will either create, or perpetuate, a dysfunctional life. Leaving large amounts of wealth will deprive those beneficiaries of the creativity and the excitement, or empowerment to create something on their own, and the self-respect gained through their own efforts. The presence of that sudden wealth can act as an impediment to the beneficiary’s own sense of self-worth. Thus, the concern that the magnitude of that wealth, and the annual income that it generates, will actually hinder the beneficiary’s own development and impede their sense of freedom to make their own life choices.

Thought needs to go into evaluating the impact of this sudden wealth on the lives of intended beneficiaries. Trust beneficiaries are individuals, not just role-players, in an estate plan. The relationship between a trustee and trust beneficiary, which abruptly appears on the death of the wealth accumulator, is often not considered in estate planning. Realistically, a trust is often much like a ‘shot-gun wedding’, where neither the trustee nor the trust beneficiary picked the other, and truth be told, neither would consciously choose the other if they had a choice in establishing a relationship.

Since a trust is an actual relationship, both the trustee and the trust beneficiary carry some responsibility to assure its success. A beneficiary has no actual training for how to perform in that relationship, and often needs a mentor. While the trustee may understand its fiduciary duties, it is equally obligated to treat trust beneficiaries as individuals, more than just a fungible role-player in their trust relationship, for however long that relationship lasts. Accordingly, a critical part of the trustee’s role is to strive to serve the growth and development of the trust beneficiary as a human being with a capacity for personal growth and accomplishment.

Some steps can be taken while the wealth accumulator is alive to ensure that the trust that they intend to use to dispense their wealth will enhance, and not hinder, the lives of their selected beneficiaries.

explain your objectives: A trust prescribes the manner in which financial wealth will be managed and distributed to beneficiaries by codifying the wealth creator’s intent. There exists a delicate balance with any trust between carrying out the trust creator’s intent and meeting the unique needs and abilities of the trust’s beneficiaries. Reading the trust instrument alone does not fully explain what the trust creator hoped to accomplish with their trust. Michigan’s trust laws often refer to a trust’s material purposes, but seldom does a trust instrument explicitly state the creator’s purpose when the trust is established. It is helpful, from both trustee and trust beneficiaries’ perspectives, for the trust creator to include in the trust instrument either a Statement of Intent, or a developed material purposes provision. This provision should address why family wealth is to be held in trust, articulate core family values and express the trust creator’s hope for the beneficiaries. Explaining the purpose behind a trust will help to reduce any resentment the trust beneficiary may feel when they find that their inheritance is ‘tied up’ in a trust.

delay decisions or choices: Some trust instruments require a trust beneficiary to make choices or decisions shortly after the trust creator’s death, e.g. pick an asset or take cash now, or instead, receive trust distributions over time. Requiring a trust beneficiary to make sudden difficult, long-term, decisions required by the trust instrument while the beneficiary emotionally deals with the loss of a family member can start the trustee-beneficiary relationship off on a bad foot. Not requiring decisions or choices for several months after the trust becomes irrevocable enables the beneficiary to grieve, and over time, become more accustomed to the trust and learn how the trust is supposed to function for that beneficiary’s benefit.

use objective criteria: If the trust creator wishes to use their wealth to incent a change in the trust beneficiary’s behavior, objective criteria should always be used so that both the trustee and beneficiary know and accept the standard by which the beneficiary’s change in behavior will be measured. All-or-nothing incentive provisions usually feel punitive and breed resentment. In some trusts, the trustee and trust beneficiary are directed by the creator to establish the behavioral standards as opposed to simply imposing them on that relationship.

remain positive and optimistic: The words used in a trust instrument can often send the wrong message to the trust beneficiary. Language that rewards a beneficiary’s behavior, not inflicts punishment or embarrassment, is far more effective to engage the beneficiary in the trust’s administration and to achieve its intended purpose, which is presumably to enhance the beneficiary’s life.

treat legacy assets as family assets: If all of the trust beneficiaries, such as closely held business interests or the family cottage, must share some assets held in trust the entire family should be engaged in discussion ahead of time about the future mutual use of those legacy assets. While these treasured assets are owned by the trust creator, they still require the input and ‘buy-in’ from all of the family members in order to avoid controversy or litigation after the owner’s death. Legacy assets entail continuing lifetime discussions with regard to wishes and desires of all family members so that the ‘wrong’ beneficiary does not end up owning, or monopolizing the legacy asset. In addition, the family needs to confront the unfortunate realization that some family members are simply incapable of sharing the use of the legacy asset with others.

understand (or try to) the generational traits of beneficiaries: With prior generations, there was often no discussion about family wealth, but there were always expectations and reactions to it. This reflected an ‘it’s my wealth, you will take it as I give it to you’ type of paternalism. Generation X and Millennials are much more skeptical and far less willing to accept that type of ‘it’s my wealth’ approach to estate planning than prior generations. Consequently, beneficiaries are less apt to blindly accept the paternalistic ‘shot-gun wedding’ approach to the transmission of wealth on a family member’s death with the use of a trust. Wealth creators need to engage younger family members in their decision-making, especially when there exists step-parents and step-children as the beneficiaries of the same ‘family trust’, each with their own set of expectations and generational attitudes towards wealth and how that wealth is to be invested, preserved and used.

plan ahead for emotional decisions: Flash points that often prompt family dissention, which can easily spill over into trust administration delays and litigious beneficiaries, need to be addressed. End-of-life decisions must be prepared for and decision-makers clearly identified in durable powers of attorney for health care and as funeral representatives, as these decisions often polarize a family. The more you decide ahead of time, the less your survivors have to quarrel about.

constantly communicate: Finally, trust beneficiaries must be prepared for the responsibilities that go along with managing wealth and the family values that enabled the accumulation of that wealth over the decades. Several conversations among the family in a non-threatening environment, like sitting around the kitchen table, will provide a beneficiary’s greater understanding of, and engagement with regard to, the disposition of the family’s wealth. Most effective to communicate those values is to tell stories of family history that enable younger family members to understand where the family has come from, who they are, and what the family most values. That understanding will help future trust beneficiaries to become responsible trust beneficiaries, good stewards of the family wealth they will ultimately enjoy, and thus better able to use that sudden wealth to enhance their lives.

A trust is a tool that can preserve both a family’s heritage and its legacy. To address the common concern of inherited wealth leading to dissolute lives, the trust beneficiary as an individual must become the focus of estate planning if the goal is to enhance the beneficiary’s life. In sum, we need to give as much attention to preparing the beneficiaries for their inheritance as there is to the preparation of the trust that will transfer that wealth.