Choices: "Why Do I Need A Trust? Setting the Stage for Decision-making"

Summary

Trusts are most often valued as vehicles for tax planning, protecting against creditors, and managing assets for beneficiaries who are minors or incapacitated adults.  While valid, these reasons tend to characterize trusts by the restrictions they impose and the harm they prevent.  Including a long-term trust as part of an estate plan should not be seen as an effort to hide assets in a remote legal fortress to protect against taxes, or improvident or immature beneficiaries.  This oversimplified and narrow focus overlooks the opportunity to construct and use trusts to improve positive decision-making by responsible adults.  A trust can be useful to set the stage for better decision-making.  The trust is established for the benefit of its beneficiaries, who under modern trust law and practice can take an active part in its management.

In common parlance the word "trust" connotes confidence, faith, and respect.  To trust lawyers, the word refers to a traditional vehicle for managing assets, whose utility depends on the circumstances. 

To a first-generation entrepreneur, however, or even to the next generation member of a wealthy family, a legal "trust" often carries an adverse connotation.  It signals a lack of trust.  "Beneficiary" does not simply reflect the legal status of someone who is benefited by a trust; it's a badge of irresponsibility. 

Behavioral scientists remind us that decisions are affected by the context in which they are made.  We act like players on a stage, and take cues from that context.  Simple examples of this are embodied in phrases such as "peer pressure," "role model," "working environment," and "corporate culture." Furthermore, our opportunity to read the clues can be hindered by context:  an unsettling environment, a recent bad experience, elevated emotions, an abbreviated time horizon, or confused objectives.  Bad decisions are often attributed to lack of information, but real world experience shows that data is always incomplete, and circumstances constantly changing, so that emphasis seems misplaced.  Instead, what truly degrades decision-making is the inability to identify and understand information and our reasons for making a decision, either due to lack of opportunity, motivation or insight. ¹  For all these reasons, improving the environment and setting the stage empowers the decision-maker by enhancing the ability to make sound decisions.

That's well enough understood, but how is decision-making connected to trusts?  Trusts traditionally have been used for:

• tax planning

• creditor protection
• managing assets for minors or for incapacitated adults.

These purposes are still valid today. 

• With few exceptions trusts are no longer effective for saving U.S. income taxes. Trusts continue, however, to be essential to reducing taxes in wealth transfers, though the results seem more difficult to achieve and the ability to eliminate future taxes entirely has been limited by the tax on generation-skipping transfers.
• Trusts have actually become more effective in protecting assets from creditors, due to changes in the U.S. law over the last ten years, even though we have seen some erosion of the protection provided in the event of divorce and the expanded protection against certain creditors has not been fully tested in the courts. 
• Trusts continue to function well for managing assets for minors and legally incompetent adults, though custodian accounts and powers of attorney have become more viable alternatives.

Yet what this traditional analysis entirely overlooks is another more subtle purpose that trusts could serve:  providing a structure for better decision-making.  Due to the unique history of trusts, not enough attention has been devoted to the role of the trust structure in influencing decision-making as compared to business organizations, which have been analyzed thoroughly as decision-making models.  What has also been overlooked is that trust law and practice have advanced far into a new stage, where the trustee can be required to share power with the beneficiaries and other advisors, and the beneficiary can initiate action over the trustee's objection. 

In this process, entirely new ways of managing trusts have been created, enabling the trust to serve a new function: to improve decision-making.  This evolution has been gradual and its effects subtle but nonetheless important.  Looking back we can now see that the trust has emerged as a potentially powerful tool - a stage - for thoughtful decision-making as a result of the dramatic progress made in redesigning the law and practice of trusts. 

What has not yet changed, unfortunately, is the common perception among many wealthy families and entrepreneurs that trusts impose handcuffs, serving as necessary devices intended only for tax planning or for those of questionable responsibility.  Those people who grew up in families with their grandfather's trusts, as well as those who created their own wealth, simply do not appreciate that trusts today can be constructed - written, and even re-written - to function as an ever-evolving stage for thoughtful decision-making designed to yield positive results, not merely avoid harm.  In this light, the demise of the helpful but paternalistic local bank trustee can be viewed as a good thing.  The destruction of that model as the best representative of the use of trusts has yielded a positive and creative result.

Given new means and methods, the trust vehicle can now set the stage for positive improvements in decision-making, not only for those entrusted with the care of minors, but for fully responsible adult beneficiaries.  Better trusts, better decisions.

• Trusts naturally speak to the future as well as the present.  Young adults tend to discount the future because it seems like a plentiful resource.  Even those mature for their years understandably see themselves as physically vibrant and implicitly immortal, and tend to look on cash as a renewable resource.  Yet we know that financial strength and opportunities are not naturally recurring conditions.  Cash truly does not grow on trees and cannot be spent today and remain available for future use.  Trusts can help young people look upon a pool of financial assets in the context of long term planning, not as an open check book but as a platform for launching a potentially fruitful life.  This longer view does not make the assets less useful.  Assets are not "locked up."  Assets are freed from the mental boundaries of a short time horizon and redirected to serve longer-term goals, a change in perspective that over time offers more power to the beneficiary, not less.   They can help write the script, not merely respond to pre-determined cues.

• Through modern trust governance, advisors can be brought into the process to help explore the richness of that longer view.  Using trusts as a context for decision-making, more experienced family members, and independent professionals, can serve on advisory boards, committees, and in manager positions to suggest alternative courses of action, identify risk, uncover opportunities, assist with implementing goals, testing results, and adjusting the course of action as conditions change. 

• The trust structure still carries with it a perceived inconvenience.  It requires planning - to design, and to implement.  While this is certainly true, the differences have almost disappeared between the planning needed for management of investments in trust and that recommended for general long-term management of investments, whether in trust or not.⁵ Trusts can now be invested without constraints imposed by traditional law, as noted above.  Moreover, it is obvious that decision-making, particularly in asset management, rarely benefits from a lack of preparation.  The freedom to avoid planning should not be highly valued but instead viewed as an impediment to growth and self-determination.  Trial and error can be a teacher, but as the sole source of learning, it is an expensive tutor.  The inconvenience of having to plan in the management of trust assets is an advantage, not a handicap.  A beneficiary helping to plan the future of a trust is engaged in planning their individual future, as well.

Trusts supply the context that encourages informed decisions based on a longer time horizon and the advice of others who speak from experience.  It provides not only access to capital, but the intangible resource of an improved decision-making process.