The opportunity for engagement
Here we consider the development and use of Investment and Distribution Policy Statements, along with their living context: the greater goals and mission of each trust for the family served.
The expression of the goals of the trust on its own can provide the foundational measures for the definition of success during active administration. The process can start with the grantors, who in making the trust, might wish to consider and express their purpose and intentions behind all the technical provisions. Their stated mission and prioritized goals can be a helpful directive.
Later, the trustee and beneficiary can articulate their goals, within the context of the language and law of the trust. In my experience, there has usually been latitude— sometimes great latitude— within the confines of the trust document for the trustee and beneficiary to define trust goals and policies.
It is worth reminding ourselves that the acts of setting goals and then working towards and achieving them are not simple for any organization. And families can be among the disorganized and unaligned organizations. In fact, sometimes goals may be accomplished only at an individual level, and not family wide.
The next level of goals lives in the policies for handling the financial assets. How should the money be distributed to accomplish the goals? How should the money be invested to support that distribution? If the assets are insufficient to support the hoped-for goals, how are the distributions and other goals adjusted?
The greater the consensus on these visions, the greater the chance for the stakeholders to view the trust as successful. And so, the primary benefit of creating these goals and policies is the building of an invaluable consensus for the trust’s direction. In so doing, the stakeholders may become more aligned and committed to the trust’s administration.
Also, policy statements can serve as valuable guides during conflict or distress. Financial advisors know that the emotional compunction to change course may be counter-productive when the market reverses direction. With the aid of written policies, the discussion during a market reversal can be to revisit the wisdom of the investment policy. If the policy is sound, then the reversal may be more comfortably ridden out. In this way, the policy statement helps avoid fear-based (and often faulty) reactive decisions.
A similar benefit is also available from establishing and leveraging formalized distribution policy statements. Let’s say that the trust supports the trustee’s discretion in paying for the education of the beneficiaries. Let’s also presume that the trustee and the beneficiaries previously set a policy to support only the post-high school education of the beneficiaries. Budgets and investments are set accordingly.
Now given a new request to pay for expensive pre-school education, the trustee is in a position to deny that request with reasons, specifically, that the express statement of the distribution policy is to support post-high school education and not pre-school education. And so, the trustee’s “no” is couched in the “yes” to the other educational activity identified in the policy— the policy which the beneficiaries had earlier consented to.
Further, in this scenario, the request for a distribution outside the existing policy statement can be used as an invitation to revisit the policy. Perhaps the family’s evolved thinking is to lessen the focus on post-high school education in favor of pre-school. That new goal can be weighed and reconsidered, along with the financial impact. And so, they can author a new distribution policy statement.
The above scenario should be compared to the more typical scenario where the trustee simply denies the distribution request under his discretionary power. Though perfectly legal, such a decision lacks, first, the support which an agreed vision provides, and, second, the ability to salve the relationship by revisiting the policy. And so, the typical scenario is not reasonably calculated to achieve success.
In the case of Spencer v. DiCola, the trustee’s denial of payment for pre-school education was not supported by an alternative or shared vision of how she would otherwise distribute trust assets. Given the lack of an agreed distribution policy, the parties also lacked a mechanism outside of court to work through the issue. The relationship between this trustee and the beneficiary family deteriorated to the point of lawsuit and two subsequent visits to the appeals court.
This inflamed conflict is all the sadder given the fact that this family had hand-picked this trustee several years before. That the trustee’s actions were sustained as legally sufficient does not make this trust’s administration successful. While it is speculative to claim that a written distribution policy statement would have transformed this particular administration into being successful, perhaps it could have at least minimized the downside.
Developing and sharing these agreed visions and policies are important to help the family enjoy a successful trust administration, especially where “success” is defined as more than just having the money handled legally.
© 2015 – 2023 Daniel P. Felix, all rights reserved.
