The relationship between a trustee and beneficiary is unique. Like an arranged marriage, it’s based on two people brought together by an agreement reflecting the wishes of a third party. It’s a relationship rooted in legal duties and responsibilities, and can last for many years.
As professional trustees, a significant part of our job is ensuring trust beneficiaries are satisfied with how the trust is handled. We believe we’re typically successful, but given the nature of human relationships, tension does arise at times. For instance, it’s not unusual for a beneficiary to be surprised to learn of a trust’s existence while being introduced to the trustee. It can be a challenging start for a team who needs to learn to work together.
The relationship works best when each party has a solid understanding of the terms of the trust and each other’s role within the trust. Notwithstanding, as with any ongoing relationship, tensions and frictions may emerge from time to time.
Here’s a look at how some tensions arise, and can be avoided with foresight, understanding and communication long before the trust becomes active. These insights may also be food for thought about whom you appoint as trustee and, on the flipside, whether you choose to accept a family or friend’s request to act as a trustee.
Pushing back on unwanted protection
Whether it’s a relative or friend, a settlor generally establishes a trust because they believe it’s necessary, or at least desirable, to protect the beneficiary’s interests. What happens if the beneficiary believes the opposite? They may feel perfectly capable of managing the trust property as if it were their own and resent the trust’s very existence. It’s a clear source of tension. One of the best ways to avoid this kind of resentment is for the settlor of a trust to personally explain to the beneficiary why they think a trust is a good idea. If that’s not doable, we have seen some settlors leave a letter, to be read after their death, explaining in their own words why they created the trust.
Either way is helpful in establishing a good working relationship between the trustee and beneficiary. Both parties then know the trustee has a job to do and that the decision to create the trust was made with good intention by the person(s) who earned the wealth.
Facing a new language
Wills and trusts contain complex legal language that usually has a very specific meaning, which may not be obvious to laypersons. For example, not everyone intuitively understands the difference between capital (or principal) and income. Many people may not understand that “encroachment” refers to a payment from trust capital for a specified purpose, often at the trustee’s discretion. The solution to this language barrier is usually education, with both the trustee and the beneficiary having a shared responsibility to learn what they need to know.
Misunderstanding the trustee’s duties
Tension often arises because a beneficiary wants the trustee to do something that the trustee knows they have a legal duty not to do. For example, a trustee may refuse a beneficiary’s request for a large payment because they believe that doing so would deplete the trust and jeopardize the future security of other beneficiaries. Or, a beneficiary might request funds for a purpose that is not permitted under the current trust terms. If the terms say the trust funds are to be used only for higher education or to help start a business, and a beneficiary requests funds to purchase a home, the trustee likely cannot fulfill that request and tension could arise. The trustee has a strict duty to follow the terms of the trust. Ongoing, clear communication with all beneficiaries regarding the purpose and terms of a trust can reduce the likelihood of conflict related to problematic requests.
Conflicting interests between current and future beneficiaries
Trusts commonly specify that one beneficiary, or group of beneficiaries, is entitled to receive income and/or capital from the trust for a period of time, after which the remaining trust funds are to be paid to a future beneficiary or beneficiaries. For example, a trust might pay all of its income to a deceased person’s spouse for the balance of his or her lifetime. When the spouse dies, the remaining trust funds go to the children of one or both spouses. In this situation, there’s a logical conflict of interest between the spouse, who may need all of the income and some of the capital to support their lifestyle, and the children who would like to see their future inheritance grow as much as possible. Often, the settlor of the trust will explicitly state that the needs of a primary beneficiary, such as a spouse, take priority, which can help the trustee when making difficult choices. Another way this concern can be mitigated is through a balanced approach to managing the trust investments over time.
Disagreeing about how trust funds should be invested
A trustee must be mindful of two primary rules when investing trust money. They need to “exercise the care, skill, diligence and judgment that a prudent investor would exercise1,” when investing money that belongs to someone else. They must also exercise what’s called an “even hand” between the current and future trust beneficiaries. In practice, this means that most trusts are invested fairly conservatively, with an investment policy that works to balance current yield and future growth while looking to reduce risk through diversification. Trust beneficiaries may wish that trust funds could be invested in riskier investments that might (or might not) achieve greater returns. This is particularly acute for families that may have generated great wealth as successful entrepreneurs, who may see a highly concentrated investment in real estate, or a family business as the best way to increase family wealth.
Disagreeing about the good use of trust money
A beneficiary may think they deserve a particular standard of living, including, for example, expensive travel. Or, they may want a large capital amount to invest in a business venture. The trustee may feel some requests are extravagant or too risky, and perhaps inconsistent with what the settlor intended. Sometimes a trust is created specifically to protect the long-term interest of a beneficiary who’s imprudent with money—in other words to protect the beneficiary from himself. This kind of tension can be the most difficult to resolve because the trustee truly believes part of their role is to put the brakes on spending. The beneficiary may view this approach as an improper intrusion in their lives. Again, the best answer is for the settlor to clearly express their intention and for the trustee and the beneficiary to work to appreciate the other’s point of view.
Communication is key
Trusts have evolved over centuries to be one of the most useful tools for achieving a myriad of estate planning objectives. However, some aspects of the trust relationship can make it challenging for trustees and beneficiaries to always see eye to eye. In our experience, the keys to success are transparency when articulating why the trust has been created, open communication between all parties to the trust, willingness by both the trustee and the beneficiary to truly try and understand why the settlor set the terms of the trust as they did, and an ability to compromise when possible within the terms of the trust. With those fundamentals in mind, trustee and beneficiary relationships grow to succeed over lifetimes.
1. This prudent investor standard is set out in the Ontario Trustee Act, RSO 1990, c T.23, section 27(1), but similar wording exists in other provincial trust legislation.