One of the most important decisions a client makes in the estate-planning process is the selection of fiduciaries who’ll represent the client when she no longer can act herself. This decision comprises nominations of agents under powers of attorney, an executor or personal representative, a trustee and perhaps, a guardian for minor children. Many estate plans may also require a client to select a trust protector and fiduciary advisors for directed trusts. Each of these fiduciaries will hold weighty but diverse responsibilities, encompassing personal care (agents under health care powers, guardians), post-mortem administration (personal representatives), exercise of discretion for asset management and distributions (trustees, advisors) and trust adaptation and redesign (protectors). Fiduciaries will fulfill their responsibilities in an environment that’s vastly different from the one that prevailed just a generation ago, the implications of which are, I believe, greatest for trustees.
A trustee’s responsibilities encompass managing assets, distributing income and principal in accordance with each trust’s mandatory or discretionary provisions, communicating with and accounting to beneficiaries and planning for and complying with tax laws, all in accordance with the terms of the trust and applicable law. Those terms begin to take shape in the estate-planning process, one that requires every client to answer five basic questions: who’ll receive my assets; how much will each receive; will assets be left outright or in trust; will we transfer assets during life or at death; and who’ll serve as a fiduciary when we can no longer act ourselves? Answers for many families, and particularly traditional families, often align with patterns shaped by traditional family attributes, tax and property law. Solutions for contemporary families may require new creativity from advisors, and the patterns they follow may not align with those suited to traditional families. Several demographic trends heighten the importance of selecting trustees who can fulfill grantor intent in a period of significant change.
Demographic Trends
First, trusts are lasting longer, thanks to trends in longevity and perpetuities legislation. The average American female has a life expectancy of 81.1 years, a male 76.1 years.1 Life expectancies for wealthy clients are even higher: For individuals in the top earnings quintile in the United States, life expectancy at age 50 is 91.1 years for females, 88.8 years for males.2 Longevity trends have several important implications for trusts: Trust portfolios must prudently navigate longer runways for the lives of current beneficiaries, and remainder beneficiaries will likely be older when they inherit, and they may inherit less.
In the perpetuities realm, an increasing number of states no longer abide by Alexander Pope’s maxim that “the laws of God as well as of man, forbid a perpetuity to stand.” At least 23 jurisdictions have either repealed the Rule Against Perpetuities or vastly extended the mandatory vesting or termination date for trusts. While it’s likely that family growth will eclipse after-tax asset growth in perpetual trusts over very long periods of time, exhausting many of these trusts of their assets, some will persist beyond the rule’s standard limitation of lives in being plus 21 years. For those trusts that are fortunate to survive beyond the rule, the class of beneficiaries they serve will grow ever larger. While U.S. fertility rates have experienced modest recent declines,3 a family with a fertility rate of two per generation would produce 1,024 descendants in its 10th generation and 524,288 in its 20th generation. Thoughtful modeling is a critical tool in the design of perpetual trusts.
Second, trustees will serve in a period of both contraction and expansion of fiduciary responsibility. Thanks to the rise of directed trusts, and the attendant reallocation of fiduciary responsibility to advisors, many trustees will fulfill the limited role of an administrative trustee, in which the scope of a trustee’s responsibility may be more narrow, but the need for communication and coordination among the trustee and the trust’s advisors will be significant. For some directed trustees, and for all trustees with plenary responsibilities, trust agreements and contemporary trust statutes will likely equip them with powers to alter a trust’s terms or its administration, including unitrust conversion and principal/income adjustment powers, the power to decant a trust’s assets to a new trust, the power to modify a trust’s terms and the power to change situs, among others.
Third, while many trustees will fulfill their duties in the context of traditional family structures, increasingly, fiduciaries will serve beneficiaries who inhabit the more diverse circumstances of modern families.
Marriage and Family Structure
The composition of household structures has changed dramatically over the last 70 years. Married couples made up nearly 80% of U.S. households in the 1950s but now constitute less than 50% of households. The fastest growing segment of our population is unmarried, heterosexual couples.4 In 1960, 59% of adults, ages 18-29, were married; today only 18% of that age cohort is married.5 But, it’s not just younger adults who are foregoing marriage: The number of older adults who are cohabiting has increased 75% in the last 10 years.6 These trends are occurring notwithstanding the significant legal and tax benefits of marriage, many of which were cited by the U.S. Supreme Court in its 2015 decision, Obergefell v. Hodges.7 A 2004 U.S. Government Accountability Office research study found 1,138 provisions of federal law that treated the relationship between two married individuals differently from any other relationship.8
Family structures have evolved in concert with the trends in marriage. In the 1950s, the most common American household structure was a married, heterosexual couple with three children. The most common household today is that of a single individual, followed by a married couple, a married couple with one child and then a married couple with two children.9 While divorce was uncommon in prior generations, owing to social stigma and beliefs about the impact of divorce on children, divorces have been more common among Baby Boomers. A frequent result is remarriage and blending of families. One out of six American children are growing up in blended families, and 40% of Americans have at least one step relative.10
Another trend facilitated by marital dissolution practices is that of the so-called “three parent family.” In this family structure, following a divorce, a second spouse may be granted parental rights. In some jurisdictions, the third parent may be recognized as a de facto parent; in others, such as those that have adopted the Revised Uniform Parentage Act, the third parent may adopt a child without the former spouse/biological parent being required to relinquish parental rights.11
Advances in assisted reproductive technology facilitate the births of children who’ll be raised in not only traditional family structures but also newer arrangements, such as elective single parenting, posthumous parenting, co-habiting/non-marital parenting, non-cohabiting/co-parenting and dibling (donor-sibling) families. In dibling 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.
U.S. census data indicate that roughly 31% of our households are ones without children, 35% are traditional families (heterosexual, married, with children) and 34% are modern families (blended, multi-generational, same sex, single parent).12 The estate-planning needs and solutions for this latter group of families may lie outside our traditional paradigms for wealth transfer and trust design.
Trusts for Blended Families
Trust design and trustee selection for blended families must navigate numerous issues that can arise from separate representation. Divorcing spouses will have been represented by separate matrimonial counsel, whose negotiations may have created support or estate-planning obligations that must be understood and addressed in the estate-planning process. Current spouses may be represented by different estate-planning attorneys. Former spouses will almost always have separate counsel. Estate plans for children of blended families will benefit greatly from communication and coordination among the spouses and their counsel to understand the support obligations, inheritance rights and estate plans that will inform the financial well being of the beneficiaries.
That communication and coordination is hard to accomplish, and it may be one of the reasons that divorced adults have the highest rates of intestacy in the United States. The Health and Retirement Study at the University of Michigan has determined that while the general intestacy rate among older (age 50 and up) Americans is 42%, among divorced adults, the intestacy rate rises to 62%.13 These intestacy statistics suggest the need for more cooperative relationships among estate planning and matrimonial counsel.
Failure to plan or the failure to communicate and coordinate while planning will likely result in plans for beneficiaries in which there are multiple, and sometimes incompatible, sources of support or discretion. A trustee’s field of view may be wide and complex in these circumstances, while her discretionary authority may be constrained by narrow ascertainable standards and limited authority to inquire about alternative or complementary sources of support or discretion. Spray trusts should be used sparingly in blended families, ideally only for minor beneficiaries of whole or half blood and of the same degree of consanguinity.
The selection of fiduciaries for blended families is similarly challenging. Plans for minor children will entail the nomination of a guardian and the selection of a trustee. These decisions have stymied myriad couples with only their own children to consider. For a blended family, however, there may be her, his and their children to think of. These are weighty, deeply personal issues, the resolution of which may sometimes be achieved by planning for the division of personal and financial responsibilities. The best individual to serve as a guardian of the person for a minor child is likely to be someone related to that child (for example, an aunt or uncle). The financial responsibilities of a trustee may best be addressed by an independent individual (an advisor, for example) or institution, perhaps acting as a co-trustee with a relative.
Trusts for Single Parents
Single parenting isn’t a new phenomenon; in the past it may have arisen involuntarily through premature mortality or divorce. Today, it may be an elective undertaking thanks to advances in assisted reproductive technology. Twenty-six percent of American children are growing up in single parent households.14 When a single parent engages in estate planning, several areas merit attention. First, it’s important to determine the children’s inheritance rights and any provisions that have been made in the estate plans of ancestors or former spouses. Second, it may also be necessary to inquire if a plan’s terms or the nomination of a guardian or selection of a trustee is constrained by provisions in a divorce decree or a co-parenting agreement. Third, inheritance rights of posthumously born children should be addressed explicitly to overcome default limitations under varying state parentage laws.
Trustees who are nominated to serve in circumstances that may be more ambiguous or adversarial parentally must have a particular appreciation for the requirements of their fiduciary duty and the ability to exercise discretion in ways that may be both creative and subject to harsh scrutiny.
Trusts for Surviving Spouses
A trust for a surviving spouse is often the first trust to be established following an individual’s death. It isn’t unlikely, owing to the high divorce rate in the United States, that this type of trust will serve a spouse who’s unrelated to the trust’s remainder beneficiaries. Forty-two million U.S. adults have been married more than once.15 The administration of such a trust is likely to be subject to the Uniform Trust Code’s (UTC) mandate that the “trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.”16
The UTC’s more transparent notification and accounting provisions, mandatory in many states, open the trust administration process to oversight by remainder beneficiaries, subjecting the trustee’s duty of impartiality to scrutiny from both current and remainder beneficiaries, any of whom may question the trustee’s discretion concerning asset allocation, trust distributions or expenses associated with maintaining or improving trust owned real estate. Remainder beneficiaries may also see a surviving spouse, particularly if she’s younger, as an impediment to their inheritance.
In an era of high federal estate tax exemptions, many trusts for surviving spouses will be bypass trusts. When the spouse is related to the remainder beneficiaries, or the relationship between the spouse and her stepchildren is good, rather than structuring such a trust as a spray trust, consider granting the spouse a limited, lifetime power to appoint to descendants, to provide dispositive flexibility and to minimize risks of intergenerational conflict.
When there’s intra-family conflict or step relations between the spouse and remainder beneficiaries, a trustee is, ideally, someone unrelated to either the surviving spouse or to the remainder beneficiaries. Indeed, the Restatement of the Law (Third) Trusts observes that “When a beneficiary serves as a trustee or when other conflict-of-interest situations exist, the conduct of the trustee in the administration of the trust will be subject to especially careful scrutiny.”17 These trustees will benefit from counsel’s guidance in understanding their duty of impartiality, particularly for actions that will modify the trust or its administration such as unitrust conversions or principal/income adjustments.
A Brave New World
What qualities will ensure that a trustee can successfully navigate this changing landscape? A well-qualified fiduciary has traditionally been an individual, or an institution with individuals, with attributes such as knowledge, wisdom, interpersonal sensitivity, discretion and the time to devote to the work. These qualities and traits, such as transparency, candor, creativity, cultural and intergenerational awareness, collaboration and listening skills, will be critical as trustees serve modern families. The lives contemporary beneficiaries lead and the ways in which they form relationships and build families may have eclipsed the patterns contemplated by the grantor. Trustees serving modern families will need to be students of the trends shaping their beneficiaries’ lives as they navigate the more fluid field between the goalposts of fulfilling grantor intent and facilitating beneficiaries’ well-being.
Endnotes
1. Centers for Disease Control and Prevention, National Center for Health Statistics, Health, United States (2018).
2. “The Growing Gap in Life Expectancy by Income: Implications for Federal Programs and Policy Responses,” The National Academies of Sciences, Engineering, and Medicine, Washington, D.C., National Academies Press (Sept. 17, 2015).
3. In 2018, the U.S. total fertility rate reached an all-time low of 1.73. Gretchen Livingston, “Is U.S. Fertility at an All-Time Low? Two of Three Measures Point to Yes,” Pew Research Center (May 22, 2019), www.pewresearch.org/fact-tank/2019/05/22/u-s-fertility-rate-explained/.
4. See Daphne Logquist, et al., “Households and Families: 2010,” 2010 Census Briefs, at p. 5, Table 2 (April 2012), www.census.gov/prod/cen2010/briefs/c2010br-14.pdf.
5. Paul Taylor and The Pew Research Center, The Next America: Boomers, Millennials and The Looming Generational Showdown (Public Affairs 2016).
6. Anthony Cilluffo and D’Vera Cohn, “10 Demographic Trends Shaping the U.S. and the World in 2017,” Pew Research Center (April 27, 2017), www.pewresearch.org/fact-tank/2017/04/27/10-demographic-trends-shaping-the-u-s-and-the-world-in-2017/.
7. Obergefell v. Hodges, 135 S.Ct. 2584, 2623 (2015).
8. Letter from Dayna D. Shah to Bill Frist (Jan. 23, 2004), U.S. General Accounting Office, GAO-04-353RR, Defense of Marriage Act.
9. Nathan Yau, “Most Common Family Types in America,” FlowingData, https://flowingdata.com/2016/07/20/modern-family-structure/.
10. “A Portrait of Stepfamilies,” Pew Research Center Social and Demographic Trends (Jan. 13, 2011), www.pewsocialtrends.org/2011/01/13/a-portrait-of-stepfamilies/.
11. See La Chapelle v. Mitten, 607 N.W.2d 151, 168 (Minn. Ct. App 2000) and Revised Uniform Parentage Act Section 613.
12. U.S. Census Bureau, “America’s Families and Living Arrangements” (2013).
13. See University of Michigan Institute for Social Research, The Health and Retirement Study, Aging in the 21st Century: Challenges and Opportunities for Americans (2017).
14. “The American Family Today,” Pew Research Center (Dec. 17, 2015), www.pewsocialtrends.org/2015/12/17/1-the-american-family-today/.
15. “A Portrait of Stepfamilies” Pew Research Center (Jan. 13, 2011), www.pewsocialtrends.org/2011/01/13/a-portrait-of-stepfamilies/.
16. Uniform Trust Code (UTC) Section 813(a).
17. Restatement of the Law (Third) Trusts, Section 34, General Comment a.