Trust Advisory Committees for Succession Planning
A trust advisory committee provides ongoing support, guidance and education for trustees and beneficiaries.
It is very common for family enterprises to have a family trust in place. On a very basic level, someone (the settlor) transfers assets to the trustee (often one or both parents) to hold legal title to the trust’s assets for the benefit of another — the beneficiary (often the rising generation and maybe the parents). The legal relationship among the settlor, trustee and beneficiary is set out in the trust deed. Stated this way, trusts sound deceptively simple, yet they are largely misunderstood and rife with challenges, complexities, conflicts of interest and the potential for many unintended and undesirable consequences.
The Trust Setup
Often, an advisor — typically an accountant or lawyer — will recommend that a trust be established to achieve a range of outcomes, such as tax efficiencies, asset protection, control and/or as a will substitute. These are all appropriate and desirable goals in many cases, so why wouldn’t you set a trust up?
The parents think this sounds like a good idea and decide to go ahead. The typical family trust experience then involves a flurry of activity around the trust setup. This phase can be a pretty overwhelming process that seems like a lot of smoke and mirrors and a lot of faith is put in the advisory team. Unfortunately, rarely is there much — if any — communication among advisors, settlor, trustees and beneficiaries that the trust even exists, let alone about its purpose. Nor is there any ongoing discussion and involvement in support of the trustees and beneficiaries.
Indeed, after the initial setup phase, the trust deed gets shelved somewhere and is rarely looked at again by anyone outside the advisory team. Yes, from time-to-time there will be documents to sign and funds will move in and out of the trust, but the trustees largely remain blissfully ignorant of their fiduciary obligations. At some point, beneficiaries start receiving distributions from the trust or income starts appearing on their tax returns. The beneficiaries start asking questions — sooner or later. So do the trustees. Then things get really interesting…
What’s the Concern?
Financial assets typically held in a family trust include shares in a family business, investment portfolio assets and real estate. These are complex and substantial financial assets that can have incredible ripple effects on family systems and family business systems. Unfortunately, the outcome of traditional transactional, “clinical” approaches to family trusts means that these ripple effects can do more harm than good. When you consider that family trusts often hold a significant portion of a family’s financial wealth, it is a wonder that so little time and attention is given to supporting the ongoing relationship among trustees and beneficiaries.
Your advisors suggested you consider a professional trustee; however, professional trustees may not be seen as a feasible option due to the nature of trust assets, costs, perceived bureaucracy, lack of personal relationship with beneficiaries or the parents not comfortable with giving up control. As a result, individuals may be appointed as trustee. These individuals may not understand their role and responsibilities as trustee. Beneficiaries often aren’t aware that they are beneficiaries. Nor do they know when or how they get distributions from the trust.
Unfortunately, individual trustees without knowledge about trusts rarely prioritize trust matters until a major issues arises. There may be an unfounded assumption that an advisor is “taking care of the trust.” As a result, the desired objectives for the trust may not be achieved, trust and tax laws may inadvertently not be complied with, and the lack of informal communication between trustees and beneficiaries can create disharmony.
What You Need to Know
Family trusts present a tremendous opportunity to mentor and nurture great stewards of a family’s wealth in the broadest sense. How do we make this shift? Consider a trust advisory committee (TAC) to support the trustees and the beneficiaries.
A TAC’s job description can be as narrow or broad as the trust deed or engagement document sets out. A TAC does not replace or eliminate the need for professional tax, accounting, legal and investment advisors. A TAC can be removed or replaced according to the terms of the trust or other engagement document with a mechanism provided to appoint a replacement.
Common reasons for having a TAC include:
- Helping trustees and beneficiaries understand the trust document
- To facilitate regular trustee meetings
- Providing guidance on appropriate trust administration
- Acting as a liaison between trustees and other advisors
- Providing education for trustees and beneficiaries around roles, rights and responsibilities
- Mentoring beneficiaries to prepare them to be good stewards of the trust property on wind-up
- Assisting beneficiaries to create a business case to request a trust loan or distributions for a business start-up or other major expenditures (wedding, home purchase, education costs, etc.)
- Facilitating discussions between trustees and beneficiaries
- Providing a sounding board and “cooling off” mechanism
- Acting as an independent voice in choosing replacement trustees
- Helping coordinate trust investment strategy in the context of the overall family wealth and succession strategy
- Preparing trustees and beneficiaries well in advance of significant transactions (sale of major assets, 21-year rule planning, etc.)
The TAC provides critical support for the current generation and builds relationships with the rising generation. In providing ongoing support, guidance and education for trustees and beneficiaries, a TAC member should:
- Be a reliable trusted advisor with relevant trust knowledge, experience and education
- Be independent and objective
- Have strong communication skills
- Work collaboratively with other advisors
- Be organized, available and a strong personality fit