A new paradigm for design and administration.
I’ve been concerned about the emotional and relational impact of trusts since I had a professionally jarring encounter in 2001 with a beneficiary of an irrevocable trust established by her grandfather. The dependency, disempowerment and entitlement I witnessed led me to ask, “Is there a better way?”
There’s a better way to think about the purpose and meaning of trusts that still honors the legal roles and responsibilities but lifts the influence of the trust to the point it becomes a generative (positive) influence in the lives of beneficiaries. The generative trust and generative trustee are that better way.
Traditional trust design centers on the choice of trustee, the tax and legal purposes of the trust instrument and the duties and powers given to the trustee. Trust administration continues to focus on managing assets, dealing with beneficiaries and managing risks.
Over the last 20 years, I’ve witnessed delegated trusts emerge as a popular choice in many jurisdictions, particularly among the ultra-affluent. Trifurcation of trustee duties is becoming increasingly common in legal forms and drafting systems, whether or not it’s part of a delegated trust. I believe we’ll see trifurcation become an increasingly popular paradigm for design and drafting of trusts even in the mass affluent marketplace.
Little, however, has changed in the last three decades in terms of the conversations that estate-planning attorneys and prospective trustees have had with trust creators1 around the pros and cons of corporate trustees and family trustees. Only recently, thanks to the efforts of family wealth experts Hartley Goldstone, Jay Hughes and others, are the trustee/beneficiary relationship and conversations growing healthier and more positive. The conversations among the attorneys, estate-planning strategists and trust creators need to evolve if we’re going to make trusts more generative.
Shift in Conversations
I believe there are two fundamental but vitally important ways in which we need to shift the design and discovery conversations:
1. The trust creators’ vision around the universe of “whys”2 for creating their trusts needs to expand beyond tax minimization, asset protection and probate avoidance. A fourth “why” needs to be offered: the possibility that the trust can become a positive and meaningful influence in the lives of today’s beneficiaries and tomorrow’s remaindermen.
2. The function of the trustee needs to be designed to do more than just manage assets (the investment function), handle compliance and record keeping (the administrative function) and dispense cash or transfer assets (the distribution function). We should also offer a fourth functional description of a trustee: the potential to have a generative influence on the beneficiaries (the generative function).
The generative trustee concept aims to improve the distribution function, leading to more positive trustee/beneficiary relationships and promoting the individual growth and well-being of beneficiaries.
Defining “Generativity”
Let’s tackle the word “generativity” and learn how it applies to the trustscape.3 The concept of generativity was developed through the writings and research of Erik Erikson, the father of modern psychosocial development theory. Erikson posited that generativity arises in middle adulthood and refers to an adult’s need and ability to care for and guide the next generation.
Generativity is usually applied to the parent-child relationship, but I believe it has great application to the role of the trustee. Through a series of questions and answers, I’d like to frame the conversation altering the potential of the generative trustee concept.
What’s a generative trust? It has two distinguishing aspects: purpose and positivity. Instead of protecting beneficiaries from themselves, the generative trust serves to empower and encourage beneficiaries. It’s a trust whose central purpose is the growth and well-being of the beneficiary. It’s also a trust grounded in the assumption that even though they may be young, immature or unproven, beneficiaries have the potential to become highly functioning adults.
A generative trust is also built on a foundation of positive emotional energy, something completely foreign to trust design conversations but an absolute game changer for both trust creators and beneficiaries. It’s a trust that could start out with these two sentences: “This trust was created out of love, faith and hope. The paramount purpose of this trust is to nurture the growth and well-being of the beneficiaries.” Love is the most obvious of the non-tax, non-legal motivating influences for a generative trust. Faith is the confidence of the trust creator in the goodness and capabilities of the beneficiary. Hope comes from the trust creator’s dreams for the potential positive and sustainable influence the trust and trustee will be in the life of the beneficiary.
How is generativity put in motion by a generative trustee? It starts by developing a very positive trustee/beneficiary relationship. Generativity in the trust context may be expressed through mentoring, teaching, training, encouraging and even jointly participating with the beneficiary in volunteer work and charitable giving. Beneficiary grants, opportunity stipends and meaningful trustee/beneficiary conversations and celebrations are hallmarks of a generative trust. A generative trustee will attend important milestones, including sporting, educational, religious or relational (birthdays, anniversaries, holiday parties and celebrations).
Does a generative trust require a generative trustee? No. But, it does require a trustee who’ll support the generative function by providing generative opportunities and resources as well as encouraging beneficiaries to take advantage of them. The generativity potential of the distribution function may be realized through the use of beneficiary coaches, trust advisors, distribution committees or mentors and consultants. Just exactly how much the actual trustee might do will depend on the design and the interest, capacities and aptitudes of the trustees. They may choose to actively participate or just be a committed supporter of the trust’s generative purpose.
How do you spot a generative trustee? What would you be looking for in an ideal generative trustee? A generative trustee isn’t necessarily someone age 45 or older. We can find younger individuals whose nature and drive are extremely generative. A key attribute of the generative trustee is the ability to help beneficiaries think for themselves instead of robbing them of that ability. Some of the other attributes of an ideal generative trustee include: strong communication skills, life wisdom as well as a healthy dose of common sense, the gift of holding people accountable, a non-judgmental and friendly persona, seeing the potential in others they don’t see in themselves and curiosity around what excites and fulfills others.
Can you have a generative trustee without a generative trust? It’s certainly possible for a trustee to become a generative trustee even when the trust document isn’t generative. In rare cases, you’ll witness spontaneous generative combustion within the trustee. It’s more likely a beneficiary may learn of the generative trust and its concepts and desire to make his trustscape more generative. But, if the document doesn’t reflect that purpose, there’s no leverage. Unless the beneficiary can remove and replace the uncooperative non-generative trustee with a generative trustee, the generative possibility will fail.
Are generative trustees born or trained/coached? How do you find/become a generative trustee? While some of us may be blessed with greater generative drive than others, I’m convinced we can all become more generative with training, coaching and practice. Currently there isn’t a public directory of generative trustees. The Purposeful Planning Institute is attracting a number of trustees, professional, independent and corporate, who are committed to making the trusts they administer generative. Training and coaching are available for those who want to become generative trustees or increase their generative skills.
Generative vs. Incentive Trusts
Many trustees function like an ATM machine. The beneficiary shows up with the proper code, and the trustee dispenses the requested cash unless the request exceeds the limits set by the trust instrument.
Sometimes the ATM machine approach is coupled with restrictive conditions or incentives to encourage the beneficiary to do something, take a certain path in life, etc. These trusts are commonly referred to as “incentive trusts,” and I’ve lectured extensively about the unintended negative consequences that too often flow from incentive trusts.
Incentive trusts are well-intentioned. The grantor of an incentive trust is certain he knows what’s best for the beneficiary and wants to protect the beneficiary from making costly mistakes or provide enticing pushes in the “right” life path.
Incentive trusts are usually built on the foundation of edicts. Do this, and you’ll get this reward. Do that, and this will be withheld or withdrawn. Psychologists such as Eileen Gallo and James Grubman warn that incentive trusts more often than not fail. Why? Because human nature resists compulsion. Extrinsic financial incentives are likely to have short-term rather than long-term impact. In some cases, the incentives may actually repel rather than compel.
Another danger of the incentive trust is handcuffing the trustee’s ability to react to unforeseen circumstances that threaten the assumptions that the grantor’s incentives were built on.
The generative trust stands in sharp contrast to the incentive trust. Generative trusts are usually designed with a best interests distribution standard and provide the trustee with discretion not only to deal with the likely and most anticipated circumstances in the path of a beneficiary but also to liberally consider how the trust can contribute to and improve the beneficiary’s happiness and well-being.
In a discussion of incentive trusts, I once heard an American College of Trust and Estate Counsel (ACTEC) fellow complain that clients were asking their trustees to become parental surrogates. He pointed out that no matter how hard a trustee tried, she would never alter the effects of poor parenting. In the almost 25 years that have elapsed since that conversation took place, I’ve seen the weeds of incentive trusts emerge. And, I’ve witnessed generative trustees overcome, or at least negate, poor parenting.
I’ve become convinced that even when clients weren’t as positive an influence as parents as they later hoped they would have been, it’s not too late to begin thinking about the generative influence a trust might have on their former (now adult) children and on the rising generations of their family.
So, how might we help a trust creator with adult or minor beneficiaries create a generative trust? The keys lie in changing our conversation and using exercises that will expand our client’s vision and allow us to capture their most positive expressions of emotional energy.
Twenty years ago, I would have dismissed that possibility as a professional pipe dream. Today, I and an increasing number of attorneys, estate-planning strategists and trust consultants know that simple but powerful exercises are available to catalyze vision, capture purpose and positivity and provide meaningful guidance to both trustees and beneficiaries.
Switching to a Generative Trust
In conversations around the possibility of a generative trust or trustee, clients may experience grantor’s remorse. They’ll wish they could have a mulligan on those trusts that are already established and in operation. Decanting into a new generative trust may be a possibility. Or, you may want to suggest the client encourage the trustee of his irrevocable trust documents to become a generative trustee or to bring in coaches, consultants or mentors who’ll help make the distribution function more generative.
We can start the process of converting a non-generative trust into a generative trust or invite a trustee to become a generative trustee through what I call “guidance & guidelights.” Guidance is for the trustees. Guidelights are for the beneficiaries. Guidance & guidelights can be integrated into a trust, added as an appendix or can stand apart from the legal document.
When offering guidance & guidelights for established trusts, those documents won’t have any binding legal effect, unless of course a trust protector or redacting is part of the process. The most common form of guidance & guidelights I work with are a letter of wishes or letter of instructions. These tools can be a vital part of a process to create a new virtual climate for the old trust. It may lead to what I call a “virtual reformation.”
A virtual reformation occurs when a cooperative generative trustee using the discretion already granted inside the old irrevocable trust document seeks to establish a healthier relationship with the beneficiaries and use the trust resources to pursue the generative purpose the trust creator expresses years after establishment of the trust agreement. Of course, the trustee has to continue to pay close attention to her legal duties under the original trust instrument. But, when a virtual reformation is possible, the generative trustee is able to see the spirit of the trust creator’s newly created purposeful vision and modify the administration of the trust so that discretion is exercised to pursue that new vision as closely as possible while staying within the legal bounds of the letter of the old instrument.
A Purposeful Trust That’s Generative
A purposeful trust is one that shares the trust creator’s positivity (love, faith and hope), values, wisdom and vision and encourages a healthy dialogue and relationship between the trustee and beneficiaries. Purposeful trusts possess the seeds of generativity. But, it takes a generative trustee to allow those seeds to germinate and produce generative results.
A friend of mine once asked, “What should I do? Build a better ship or train a better captain?” We were talking about the role of a trustee and the trustee’s potential influence, for better or worse, on the next generations of the trust creator’s family. I believe the answer to his question is: You must do both. You need both a purposeful trust and a generative trustee.
The generative trustee will invest as much time and energy in the exercise of distribution discretion as is spent on the investment management and trust administration responsibilities. Ideally, a generative trustee will serve as both a mentor and accountability partner to the beneficiaries. In many senses, the generative trustee is the alter ego of a wise and loving parent. But, because the possible influence of a generative trustee is most strongly felt during and after the beneficiary’s journey to individuation, the generative trustee can’t approach his role in a paternalistic or hierarchical manner. He demeans the role, however, if he just becomes “best buds” with the beneficiary.
Generative Trustee in Action
When I first spoke at an ACTEC meeting about the possibility of a generative trustee more than a decade ago, a retired fellow in his 80s approached me.
This man worked with a trial attorney who had risen to national prominence from humble beginnings in Texas. The trial attorney and his wife had only one child, a son in his late 20s, who was a twice-convicted felon then serving his sentence in a state prison. The trial attorney insisted, over his wife’s objections, that their joint trust be an incentive trust. It would provide incentives for their son to get an education, hold a job and live drug-free. If the son failed the mandatory drug tests, he’d be cut off.
This ACTEC fellow saw this plan go into effect when the trial attorney died a short time later. The wife had wanted to change the plan but couldn’t or wouldn’t go against her husband’s wishes, and she died before her son was released from prison. One day the son showed up in the ACTEC fellow’s office. The son had been reading the trust document. He saw the possibility he could get an education. He asked the ACTEC fellow, who also served as a co-trustee with XYZ Bank, to champion his request to the corporate trustee for funds to get an education. He wanted to be a lawyer like his father.
The ACTEC fellow counseled the son that as a felon, it was a pipe dream to imagine he could get admitted to law school, let alone get admitted to the bar. The son persisted. He finished his undergraduate degree, stayed clean and volunteered in a poverty law clinic. He scored exceptionally well on his LSAT. But, he received one rejection after another from the law schools he sought to attend. He returned and asked the ACTEC fellow to accompany him to meet with the Dean of a law school in their community. In that meeting, the ACTEC fellow told the Dean he would mentor the now 30-something law student, and while it was unlikely he could ever practice law, he could use his legal education to help others by working behind the scenes in legal clinics or perhaps as a legal assistant. The Dean reluctantly agreed to the experiment.
Three years later, the son graduated with honors. He took the bar exam and passed but was denied admission because of the felony convictions. He came to the ACTEC fellow again and said, “I’m going to appeal my denial. Will you be a character witness?” The Dean and the ACTEC fellow were the key witnesses. The son was admitted to the bar and became a very successful lawyer. All of this was made possible because of a generative co-trustee. There wasn’t a purposeful trust or a generative trust. Just a generative professional who supported the dream of a beneficiary.
Let’s all do our part, whether as the designers, drafters or administrators of trusts, to allow the generative potential of the trustscape to be realized.
Endnotes
1. “Trust creator” is a term I’ve coined to describe the grantor of a purposeful or generative trust. It recognizes the possibility a grantor can play a much more active role in the creation of the trust when we use “Purposeful Visioning Exercises” as tools in the discovery and design phases.
2. The Purposeful Planning Institute (PPI) has created a Why a Trust? Why This Trust? exercise that we’ll be happy to provide. Contact me at info@purposefulplanninginstitute.com.
3. “Trustscape” is a term coined by Hartley Goldstone, which refers to the entire landscape making up a healthy trust system.