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A Trustee’s perspective - all 14 formats
Article by: Michael Giraud and Ally Jaulim
Estate & Succession Planning 19 June 2023

Rolling with the Punches

Love, hate, happiness, anger, envy, pride, and fear are just a few of the emotions that families deal with on a frequent basis. There is not a single individual, family, or culture that is immune to emotions or their consequences. Not only are emotions a constant around the world, but so too is their propensity to dictate a person’s decisions and their subsequent actions. We have all experienced instances, both professionally and personally, where we have seen people make emotional decisions void of logical reasoning. Such decisions may lead to a person’s judgement being clouded and, even within the closest of family groups, to potential family disputes.

Emotions can also be heightened when a trustee is introduced into a family’s succession plan and this can be exasperated if they are holding what is considered an ‘emotive’ asset. This is as certain family members may have a strong emotional connection to the asset and, possibly, an underlying sense of entitlement to it or a desire to control, or personally own the asset.  Relationships may quickly deteriorate when a trustee becomes the legal owner of such assets if potential causes of conflict are not identified, discussed, and properly addressed by all parties.  History has frequently demonstrated that conflicts arising in relation to emotive assets can result in prolonged and expensive disputes, especially if the assets are valuable and multiple branches and generations of a family are involved.

So, what exactly are emotive assets, and, from a practical perspective, what steps can a trustee take to try and avoid family conflicts arising when these assets are held on trust?

As we know, each family’s estate and succession plan should be bespoke, and this is especially true when complex assets form part of an estate. In general terms, emotive assets may include shares in a closely held business, a family home, or a long-held family chattel, and may even extend to certain luxury assets.  When settling assets onto a structure it is important for their ‘emotional value’ to be identified so that appropriate measures can be put in place to manage the associated risks and expectations. 

Trustees and advisors will agree that holding these assets increases a structure’s fiduciary risk and, depending on the asset, it may even result in a structure being put under financial strain (e.g., if the assets are illiquid, require regular maintenance, or are failing). 

Identifying these risks at the outset will help mitigate them and ensure that mechanisms and controls are put in place to manage the remaining risks. This can be done with careful drafting of the trust instrument, which may include specified asset clauses, reserved powers, appointment of committees to deal with investments or certain asset classes, and robust anti-Bartlett clauses. If the asset is sufficiently valuable or risky, or if a family dynamic is particularly difficult, then a corporate trustee may wish to further distance itself from the perceived fiduciary, business, and reputation risk by suggesting the use of a private trust company. 

Caution is of course paramount and, although modern trust legislation is extremely flexible, one of the principal constraints on what should be drafted into a trust instrument is tax legislation.  It may restrict the control that individuals are able to exert over trust assets and a structure generally and, with this in mind, it is essential that trustees always work alongside competent legal and tax advisors when establishing and administering a trust.

Although certain risks can be mitigated through careful drafting, managing the ongoing risk requires continuous communication with beneficiaries and related parties to ensure that a structure evolves to remain fit for purpose. Ensuring detailed knowledge of your beneficiaries’ circumstances and their family dynamics, along with their unique characters and personalities, cannot be overstated. 

Doing this will be invaluable when material decisions are taken or when there is a significant event within a family (the most obvious scenario being the death of a matriarch or patriarch). Reactions to such events may include a power vacuum, with certain beneficiaries vying to assert themselves, trying to force a trustee to divest of assets, or wrestle control away from the trustee.  This might be on account of diverging long-term interests amongst the beneficial class, spendthrifts attempting to free up liquidity, growing disharmony within a family, or simply an aversion to the settlor’s wishes and intentions for the assets. 

Understanding family dynamics will allow a trustee, and its advisors, to plan as best as possible for such eventualities.  They should be able to implement a viable strategy to compensate for, or address, the fallout amongst the beneficiaries and any other stakeholders. 

So, what does this mean in practice for a trustee? 

In terms of communication, this will include setting out and agreeing an investment strategy and ideally a family constitution to document a family’s vision and values.  The constitution will also establish the rules and guidelines by which the family operates in relation to their personal investments, businesses, trust assets, family communications, governance, etc. 

It is worth noting the importance involving family members in the drafting of a constitution and actually getting it signed during a matriarch or patriarch’s lifetime.  Our experience would suggest that matters may go awry following the death of the matriarch or patriarch, and too often the most eloquently drafted documents end up never being signed. 

It is also important for a trustee to consider that with emotive assets there may be stakeholders that do not form part of a structure’s beneficial class.  The interests of these stakeholders must also be considered when establishing the strategy for the asset and its ongoing ownership, as they will be important to its ongoing success. 

The three-circle model developed by John Davis and Renato Tagiuri at Harvard Business School in 1978 is a tested and widely adopted analysis tool for considering stakeholder interests in assets such as family company shares. This type of analysis should be incorporated into any asset with stakeholders outside of a family and beneficial class.

There also needs to be a realisation that existing family members may not be the most suitable persons to manage an asset such as a family business. Such considerations may be covered off in a signed family constitution, however, if not, then the onus will be on the trustee to act.  This is especially true as a trustee will frequently be the majority shareholder of such a business and so it should act in the manner expected of any concerned shareholder.  It needs to be accepted that this may include the establishment of a wholly independent management team for the business (which may or may not include a trustee representative or a family member). 

A trustee will need to carefully consider what to do with an asset if it is held in an illiquid structure; if an asset requires maintenance or for liabilities to be paid?  The simple answer is that the trustee may need to make an unpopular decision for the long-term benefit of the structure and its beneficiaries.  This may mean selling or renting/leasing an illiquid asset to provide liquidity.  Such an asset may include a family property, a long-held chattel, or perhaps a luxury asset.

What is noted in this article is by no means a conclusive list of considerations for a trustee holding emotive assets. What is clear though is that when holding emotive assets, a trustee cannot passively sit in the shadows and be purely reactive to events.  A trustee needs to be aware of the risk associated with these assets and be proactive in terms of the decisions it makes and the administration of the structure.  These decisions need to be made following careful consultation with the family’s advisors and the family itself.  They may be difficult, but they will also be essential to ensure that a structure continues into the future providing a family with an ongoing legacy for multiple generations of beneficiaries. 

This article was first published in the STEP Journal, ‘Rolling with the Punches’, STEP Journal (Vol31 Iss1), pp.50 – 53.