What Shall We Tell the Children Dear?: The Importance of Establishing A Beneficiary Communication Model Before State Law Does It For You

Susan P. Rounds
Senior Vice President, Senior Director of Planning
Wells Fargo Private Bank

The senior generation of a wealthy family usually has some notion of what and when to tell the next generation about family finances. This is typically based on the family goals and family philosophy on how to reach those goals. For example, if parents are concerned that their offspring will fail to become productive members of society if all the financial facts and circumstances are revealed, the parents might be closed-mouthed or vague about the amount of wealth that will be passed along.

On the other hand, some families want to inform their kids and involve them in the process of managing wealth early because they believe this is the best way to develop the next generation of responsible wealth owners. After all, this next generation will carry the torch of the family legacy into the future. Even if the family believes that it is in the best interest of the kids to have some involvement, the parents may not fully disclose the facts because they can’t decide on the “how” and the “what.” This sort of communication can seem difficult to approach and is easy to put off.

If the wealth to be passed on is held in trust, the ostrich approach can be dangerous because state law may make the decision for you. Although the overriding objective of the common law of trust is to abide by the intent of the grantor (as long as it is not illegal or against public policy), if the trust document is not clear or is silent on a point, then state law, acting as a default, may fill in the gaps. The intent of the grantor can’t be followed if it is not written in to the document.

Any given state may require that more, rather than less, information is provided sooner, rather than later. Accordingly, it is incumbent on the trust settlor to establish a beneficiary communication model, which dictates the “who,” the “what,” and the “when.”

Generally, we are concerned with three different types of beneficiaries here. Two are vested classes and one is contingent. An interest is “vested” when the right to enjoyment, either present or prospective, has become the property of some particular person or entity¹. A vested interest is absolute. A beneficiary can be vested with a current interest, such as the right to receive income from the trust, or vested with a future interest, such as the right to receive the remainder of the trust at a certain age, or when the trust terminates.

A “contingent” interest is a possibility – it is provisional but not assured. A contingent interest is conditioned upon the happening or nonhappening of some future event, which is itself uncertain or questionable². For example, a contingent beneficiary may be required to survive the grantor or graduate from college before the prospective interest is vested.

There is currently a wide variation among the states as to what information must be provided to beneficiaries, especially with regard to a contingent beneficiary. If a beneficiary is vested, then as a general rule, he or she is legally entitled to receive some information on a regular basis, such as quarterly or annual statements. If a beneficiary is contingent, there may be no fiduciary duty to provide information, or the trustee may be obligated to send information only if the beneficiary knows enough to request it.

The use of trusts, both in family estate planning and commercial transactions has increased dramatically in recent years, resulting in a corresponding rise in the number of day-to-day questions involving trusts and the realization that trust law in many states is quite thin. In recognition of this situation, the Uniform Trust Code (UTC) was drafted to provide a readily available source of trust law in the states that adopt it.³

The UTC continues the trend toward considering and weighing the interests of several classes of beneficiaries. One of the issues addressed is whether or not a given beneficiary is entitled to receive certain information about a trust. The UTC is intended to provide a default position that kicks in only if the document is silent⁴, so it is incumbent upon trust drafters to include this information before state law does it for them.

The trustee’s duty to inform and report is governed under Section 813. In this section, the UTC extends the trustee’s duty to provide information from the typical case of a vested beneficiary currently eligible to receive a distribution to “first-line remaindermen. First-line remaindermen are generally those who become eligible to receive distributions upon the death of beneficiaries currently eligible to receive income from the trust.

The settlor always has the option of requiring that more information be given to beneficiaries, of any classification, than the amount required under the laws of the state in which the trust is administered. However, the settlor may not have the option of providing that less information will be given than required under state law. Under the UTC, certain notices need be given only to the “qualified beneficiaries” (vested and first-line remainder contingent beneficiaries). Among these are notice of a transfer of the trust’s principal place of administration, notice of a trust division or combination, notice of a trustee resignation and notice of a trustee’s annual report.⁵

Other beneficiaries who do not fall into the definition of a qualified beneficiary – such as beneficiaries with remote remainder interests- must receive certain information when they file a specific request with the trustee. The UTC provides that they may receive a notice of the existence of the trust, the identity of the trustee and the right to request trustee’s reports. The settlor can waive this notice only if the remote contingent beneficiary is under the age of 25.⁶ The UTC imposes these special obligations on a trustee to provide information because of the vulnerability of the beneficiaries and beneficial interest. Thus, the UTC provides that if a beneficiary makes a request for information, the trustee must promptly comply with the request unless it is unreasonable under the circumstances. Moreover, since the beneficiary should be allowed to make an independent assessment of what information is relevant to protecting his or her own interest, the trustee is required to furnish on request a complete copy of the trust instrument and not merely those portions that the trustee deems relevant to the beneficiary’s interest. This is in contrast to the Uniform Probate Code, which provides that “upon reasonable request, the trustee shall provide the beneficiary with a copy of the terms of the trust which describe or affect the interest.”⁷

Many families, trustees and family advisors are of the opinion that more information provided sooner is the best general policy. After all, the key to many good relationships is effective communication. Chances are that the earlier the next generation is told about the family’s financial situation, the more successful that family will be overall. If a reluctance to share information is based on a fear that the kids will succumb to some strain of “affluenza” (a chronic lack of motivation related to excess consumerism enabled by having large sums of money at one’s disposal), why not teach them how to use the wealth effectively? Practically speaking, it is quite likely that if anyone in the younger generation, cousins included, has the information, they all will.

Regardless of the particular stance on this delicate issue, make sure that a decision is made regarding who finds out what, and when they do so. If a client is of the mind that less is more, be sure the trust documents reflect this desire or the trust may fall under a contrary default rule in the state in which it is administered. Moreover, with the trend toward a default rule requiring that more information be provided, corporate trustees administering trusts in many states may be inclined to automatically send out all information that would be required in a “worst-case” scenario.

On the home front, some families are split on the decision of how to handle this issue. It may be helpful for clients to recognize that just like the story of the birds and the bees, there is a good chance that if the cousins know, their kids will know, too.

¹Black’s Law Dictionary, Abridged 6th Edition
²Id.
³Uniform Trust Code, Prefatory Comment. According to the Uniform Law Commission 2014 Legislative Fact Sheet, to date the UTC has been adopted in the following 27 US jurisdictions, Alabama, Arizona, Arkansas, District of Columbia, Florida, Kansas, Maine, Massachusetts, Michigan, Missouri, Montana, Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming. 2014 introductions include Kentucky, Maryland, and Mississippi. http://www.uniformlaws.org/
⁴Uniform Trust Code, Article 1, General Comment
⁵Uniform Trust Code Section 103(13)
⁶Uniform Trust Code Section 105(b)(8)
⁷Uniform Probate Code Section 7-303(a)

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Wells Fargo Wealth Management provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo & Company and its affiliates do not provide legal advice.