Family Wealth = Resources (Human Capital + Relational Capital)

Professionalism is overwhelming, even for us professionals. Many of you reading are professionals and I know you folks are already nodding along 🙂

Unless the topic is within your subject-matter domain, the complexity and nuance of pretty much everything topic is difficult to navigate. And here’s the key: when a topic is hard to navigate, mistakes are made.

Trust structuring within estate planning advice is an area where tradeoffs are made all the time. Today, I’m focusing on one tradeoff that was decided upon at the industrial scale. The tradeoff resulted from the professionalization in the modern law of trusts. We obtained more objective certainty but impaired trusts’ ability to support family legacy.

But fear not! All that needs to change in trusts requires a rewiring of the professionalization of the trustscape**… yes that was sarcastic.

Although there is a lot of inertia to overcome, there are incredible estate planning professionals leading the way. Combined with the hard work by wealth stewards in clarifying their family wealth strategy, there are many examples of effective trusts. This month’s perspective relies on all of their hard work. Let’s dig in.

The mistaken prioritization of the trustee duties to the money over the people

Estate planners estimate that over 80% of American wealth ends up in a trust by the second generation. Eighty percent! So the Trustee/Beneficiary relationship is certainly critical to long-term effective family wealth strategy.

The mistake I see is that all of the duties of the Trustee to the capital (the money) are prioritized over the responsibilities to the beneficiary or beneficiaries. Meaning the exact people the relationship intends to benefit are second place!

(I won’t rabbit-hole this mistake but I will say that both the Duty of Even Hand and Duty of Conflict would be very different with a human-driven standard instead of a financial standard. Also, the Duty of Regis, perhaps the most important Duty, is no longer codified into any statute that I’ve read. That is the key Duty for beneficiary flourishing!)

Ensuring the trust does what we intend therefore requires a bit of pushing against legal intertia!

What are your financial resources goals… really

Is your goal for the family wealth really to, “protect the money because I don’t trust my family to make good financial decisions?” To say that trusts aren’t very trusting is now trite in estate planning circles. This saddens me. The goal should be to deploy capital in the best ways possible to benefit the lives of the beneficiaries.

Strong legal drafting and good governance

Where capital deployment is less prudent from a pure investment strategy perspective, the law typically says the trustees are in contravention of law. So, returning the priority to the beneficiaries over the investments requires strong legal drafting combined with caring trustees.

I admire the estate planners that have written into their trust deeds specific family wealth strategic goals. Jay Hughes, long an estate planner and a fifth-generation attorney, recommends that every trust start with this line:

“this Trust is intended to be a gift of love to benefit the lives of the beneficiaries”. 

Intent arises when the tough decisions require the Trustees to go back to the Trust Deed and seek more guidance. With Jay’s clause, the intent charges the Trustees with taking the time to learn consider something pretty darn important: how would the decision actually impact the beneficiaries’ lives? Does it really benefit them?

This reminds me very much of the introduction of ESG; it is much more difficult to apply a multi-stakeholder standard than a pure financial standard but many families will prefer the more difficult, and less precise, standard.

The precise standard suits the investment industry just fine. Same thing for the Trust Companies that are commonly embedded in financial institutions. Spoiled rotten beneficiaries love to challenge non-precise standards so they and their lawyers, in a perverse sense, benefit from the non-financial standard.

But the pure financial standard infantilizes the relationship between wealth stewards and their family’s capital. It makes it difficult to deploy financial capital in a fashion that is less financially-prudent but more greatly enhances the lives of the beneficiaries. The standard often makes both trustees and beneficiaries feel beholden to the investment professionals.

Do you want to protect the Trust Fund from rotten beneficiaries to the detriment of the strong beneficiaries?

Do you want the family capital invested as prudently as possible or do you want room for the family to make investment mistakes?

These are the tricky questions that lead me to write this blog.

Were you able to get to your answers quickly? Or like me, is your family wealth strategy continuing to clarify?***

ASH Family Enterprises Ltd.

With that segue perfectly nailed, I’m happy to introduce the branding of my Holding Company. I wanted to put to writing my investment policy statement, complete with sections on investing for well-being, flourishing and impact. There are of course Family Bank policies embedded as well. This is also a reflection of my work clarifying my focus within family office investments. I cannot remember where the advice came from, but I was told from a family office executive that “if you cannot clearly identify what investments you want to see, you’ll see all of them, particularly the bad ones.”

In launching ASH Family Enterprises, I leave with this cheers:

To the good times when we invest and make money, and,

To the great times that we invest and make legacies.