Trusts: Easy as Pi

The first Pi Day was celebrated in 1988 with the consumption of fruit pies. Since then, March 14 has been a day to relish 1) pies 2) circles and circular things 3) math and geometry. As a trust officer, I relish the opportunity it provides me to do some myth-busting on common misconceptions I’ve heard from beneficiaries over the years, as well as to highlight some powerful aspects of modern trust law. Understanding trusts really can be as easy as “Pi”!

Dividing the Trust Pie among Beneficiaries

Trusts are a unique arrangement in the law. Trusts place legal ownership of trust assets in the trustee, but only for the benefit of beneficiaries. If a trust has one beneficiary, and the trustee’s job is to distribute all the assets to that beneficiary as soon as possible, things are pretty straightforward. Dividing the pie gets more complicated when a trust continues for the lifetime of that beneficiary, and then goes to one or more additional people or charities. It’s also more complicated when a trust has multiple beneficiaries. How does a trustee (who has a duty to treat beneficiaries impartially) decide who gets what, how much, and when?

One of the misconceptions we hear from beneficiaries when discussing distributions with them is their claim that “it’s my money – what do you mean there are other people to consider?” There is a sense in which they are correct – as a beneficiary of a trust, the trust’s resources are there to benefit that person. But being made a beneficiary of a trust is much different than, say, being left funds in a bank account, investment account, or life insurance proceeds. In those situations, a person has complete authority and control over those funds to do with as they deem best. What “best” means is often in the eye of the beholder. If a brand-new exotic car or a week in Vegas is “best” to that person, they have the funds to spend. It truly and fully is “their money.” 

Technically, if the assets are in trust, it is not the beneficiary’s money. The trustee uses the trust’s assets for the benefit of all the beneficiaries. This means that, in a trust situation, the pie has to be cut. The following example may be helpful to illustrate how this might look.

Assume mom and dad establish a trust for the benefit of their daughter, Carol. The trust says she gets benefits for her lifetime, and then any remainder is to be given to her daughters, Marcia, Jan and Cindy. If the trustee has any discretion in making distributions to Carol, the future interests Marcia, Jan and Cindy must be given some consideration. The trustee must be impartial between the interest of Carol (the current beneficiary) and Marcia, Jan and Cindy (the future beneficiaries).  If the trustee is too generous in serving “pie” to Carol, the “slice” that was intended to go to Marcia, Jan, and Cindy will not exist when the time comes (or, it may be a more meager serving than it should have been). The fact that the “trust pie” has “slices” that won’t be “eaten” for a generation makes it easy for a beneficiary like Carol to question why those slices aren’t available to her now—but the trustee’s job is to remember the interests of Marcia, Jan and Cindy in the way that their grandparents (communicated through the terms of the trust) intended. Conversely, the trustee’s impartiality means that it also cannot be too stingy with Carol to enlarge the share of the pie received by Marcia, Jan and Cindy.

This is a simple example, but there are many other ways in which a trustmaker can tell a trustee to carve up the pie —it’s the trustee’s job to know what the trust document says and slice the pie as fairly as possible in light of those instructions. 

Dividing the Trustee’s Pie

For centuries of trust law, the trustee has been the person responsible for all aspects of the trust’s management. The trustee’s job includes:

  • Reading and interpreting the trust’s instructions regarding distributions to beneficiaries
  • Overseeing how the assets of the trust are managed and invested
  • Making sure all the trust’s goings-on are accounted for and proper records kept, keeping beneficiaries informed about the trust
  • Gathering information from beneficiaries to inform its administration (sometimes also including additional support for beneficiaries if they are young or have special needs)
  • Ensuring compliance with regulations and tax laws (and engaging in planning to conduct the administration in a tax efficient way)
  • Managing risk (insuring and protecting the trust)
  • Defending the trust and its assets when necessary
  • Allocating receipts between income and principal
  • Mediating conflicts between parties (sometimes including beneficiaries)

These duties are the most common, but there can be many others. The trustee does all this within the context of sometimes-complicated state and federal laws and regulations, and while adhering to the highest standard of care as a fiduciary. 

In the last 40 years or so in the US, the law has evolved so that a person creating a trust can slice up that pie by giving different jobs and responsibilities to different people. These are known as directed trusts. For example, a trust may provide that a trustee does all normal duties, but the slice of pie that contains duties related to the assets of the trust is assigned to a different person, committee, or entity (called an investment director, or investment trust advisor). This is helpful if there are unique assets or business interests that the trust is designed to hold. The investment director may be installed because it has more expertise in handling the specific type of asset, or to retain more control. Another common slice that is carved out from a trustee’s traditional duties is for distribution decisions. For example, distribution decisions could be handled by a party closer to the beneficiary (such as a minor beneficiary’s guardian), without burdening the guardian with all the additional responsibilities of trusteeship.

These are just two common examples of powers that a trust can give to someone other than a trustee. (We’ll be talking more in-depth about directed trusts in another blog post).

Easy as Pi

Like baking a pie, creating, and managing a trust requires careful consideration, attention to detail, and occasionally a dash of creativity. Trusts, like pies, come in various flavors and sizes, each tailored to suit individual preferences and needs. So, whether you celebrate pi day with a delicious dessert or by crafting a comprehensive estate plan, remember: the right combination of ingredients and a skilled hand can yield something that leaves all involved with happy memories. And that’s a good thing – any way you slice it.

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