The following language provides examples of provisions that might be included in a Financial Skills Trust. The assumptions underlying the sample language are threefold: the Settlor (i) views the beneficiaries as responsible (no known substance abuse issues or mental or emotional illness) but in need of financial education, (ii) wants to use a unitrust approach to income distributions once the beneficiaries are adults and (iii) intends for the beneficiaries to become trustees of their own trusts in graduated stages.
Variations on the theme are limited only by the imagination of the estate planner, settlor, and, if involved in the conceptualization process, the trustee and the beneficiaries. The trust instrument might not include a provision authorizing the trustee to postpone the ages at which the beneficiaries become sole trustees of a portion of their trusts or even eliminate such provisions if the beneficiaries develop mental or emotional problems that make serving as trustee problematical. The trust might not use a unitrust approach but instead make distributions of any income or principal discretionary on the beneficiaries having demonstrated compliance with all or a majority of the seven financial skills. The trust might authorize the trustee to appoint beneficiaries as sole trustees of a portion of their trusts at such time as the beneficiaries have demonstrated compliance with all or a majority of the seven financial benchmarks.
In order to minimize mind-reading on the part of the beneficiary and excessive subjectivity on the part of the trustee, the Financial Skills Trust needs to be as operational as possible. What the Settlor means by each of the seven financial skills should be described objectively. A detailed discussion with the Settlor of the seven skills is fundamental to defining the basic parameters for how the Trustee’s discretion is to exercised. Clients and advisors often find that some of their most useful conversations about family wealth occur during this stage of developing a Financial Skills Trust. For example, what does the client view as “living within one’s means?” Does it mean spending at or less than 100% of one’s net income after taxes in a given year or to provide flexibility, should it refer to “spending not to exceed 110% of income a year for a two year period” or some similar criterion? Similarly, for some clients “not abusing credit” may mean a debt-to-income ratio not to exceed a certain level, while others may prefer a minimum FICO score or credit rating, or a level of debt service that remains proportional to income or assets up to a specified range.
The sample language DOES NOT contain the objective definitions of each of the seven skills since such definitions are developed in discussions between the client and his or her advisors. Instead, the sample language contains a reference to Appendix A, where the objective standards would be inserted. Appendix A is both the most time consuming and most rewarding part of drafting a Financial Skills Trust.
THE SAMPLE LANGUAGE IS OFFERED FOR PURPOSES OF ILLUSTRATION ONLY AND SHOULD NOT BE USED WITHOUT THE ADVICE OF COMPETENT LEGAL COUNSEL.
To my descendants and their Trustees, both living and those to be conceived and born in the future:
On the most basic level, the purpose of this trust is to further the pursuit of happiness by my descendants. I use the phrase the pursuit of happiness in the same way as our Founding Fathers used it in the Declaration of Independence. Neither they nor I were or are talking about acquiring more material goods or taking longer vacations but rather the sense of self-sufficiency that is derived from becoming self-reliant and financially sound, having a sense of emotional, social, and mental competence and giving back to the community.
The money in this trust will help make things more convenient for my descendants but it cannot make them happy. I believe that the family’s money, including the money in this trust, should be viewed as a tool to support the growth of the family’s real capital, which consists of the family members and their knowledge achieved through life experience and education. This is why I believe that travel, involvement in philanthropy and education to one’s maximum potential are so important.
The trust is designed to provide my descendants with the opportunity for a paced introduction to and education in the capable and responsible ownership of wealth.
Until a beneficiary attains age twenty-five (25), the Trustee shall pay to the beneficiary, if the beneficiary is a minor, by distributing such sums to the Guardian of his Person or any fit person with whom the beneficiary resides, or if the beneficiary is an adult, by distributing such sums to the beneficiary, or by applying such sums for his benefit, as much of the net income and principal of the trust estate as the Trustee considers reasonable and necessary to provide for his education, support, and his medical, dental, hospital and nursing expenses and expenses of invalidism. Any income not so distributed shall become principal.
Once the beneficiary attains age twenty-five (25), the Trustee shall pay to the beneficiary each year a unitrust amount from the beneficiary’s trust equal to three percent (3%) of the net fair market value of the assets of such trust valued as of the applicable Valuation Date (the “Unitrust Amount”). The Unitrust Amount shall be paid in four (4) equal installments, payable at the end of each calendar quarter, from the net income of the trust and, to the extent such income is not sufficient, from principal. Any net income of the trust estate for a taxable year in excess of the Unitrust Amount shall be added to principal. “Valuation Date” means the first business day of the applicable taxable year of the beneficiary’s trust. The taxable year of the trust shall be the calendar year.
The Independent Trustee may distribute to the beneficiary, in addition to the Unitrust Amount, such sums from the beneficiary’s trust as the Independent Trustee determines, in the Independent Trustee’s sole and absolute discretion, to be reasonably appropriate and consistent with the purposes of the beneficiary’s trust, as explained in this Article.
In determining the unitrust amount payable to the beneficiary, the Trustee shall prorate the same on a daily basis for a short taxable year and for the taxable year ending with the beneficiary’s death. Notwithstanding the foregoing, in the year in which the beneficiary’s death occurs, the Trustee’s obligation to pay the unitrust amount shall terminate with the payment immediately preceding his or her death.
If any unitrust payment is incorrectly determined, then the Trustee shall pay to the beneficiary, in the case of an undervaluation, or the beneficiary shall repay to the trust, in the case of an overvaluation, an amount equal to the difference between the amount actually paid and the amount that should have been paid. Such payment shall be made within a reasonable period after the final determination of the correct unitrust amount.
As used herein, the term “medical, dental, hospital and nursing expenses and expenses of invalidism” include distributions for physical, mental, emotional, and health needs. Health needs include health insurance and therapy, physical and psychological/emotional, as well as expenses of cosmetic surgery.
As used herein, the term “education” means elementary and secondary schooling, vocational training and trade schools, college and postgraduate study, whether at a public or private institution whether in the United States or abroad, and supplemental education programs and recreational and enrichment activities, whether as part of or in addition to the regular school curriculum. Education also includes all forms of lifelong learning whether such programs focus on career and business education (including career changes or beneficiaries resuming their education after dropping out of school for a period of time) or the personal curiosity and passions of the beneficiaries. Distributions for education shall include tuition, books, supplies, tutors, travel and related living expenses. I believe that it is important for the Trustee to facilitate educational experiences that will enhance a beneficiary’s well being and help him develop a global view and appreciation of diverse cultures. Accordingly, the term “education” also includes reasonable world travel.
Subject to the discretion of the Independent Trustee set forth below, the beneficiary shall become sole Trustee of twenty-five percent (25%) of the beneficiary’s trust when the beneficiary attains age thirty (30).
Subject to the discretion of the Independent Trustee set forth below, the beneficiary shall become sole Trustee of fifty percent (50%) of the remaining balance of the beneficiary’s trust when the beneficiary attains age thirty-five (35).
Subject to the discretion of the Independent Trustee set forth below, the beneficiary shall become sole Trustee of f the remaining balance of the beneficiary’s trust when the beneficiary attains after forty (40).
In exercising their discretion whether to distribute income or principal to or for the benefit of a beneficiary or whether the beneficiary should become sole trustee of any or all of his or her trust, I wish the Independent Trustees to take into consideration, in addition to such other factors as they deem reasonable, the extent to which the beneficiary demonstrates growth of the following skills, recognized and explained in the written literature about financial literacy:
1. The ability to live within one’s means, i.e., managing spending consistent with one’s level of income;
2. The ability to manage spending relative to income in a manner that would be consistent with being able to save a portion of income, as needed;
3. The ability to understand and manage credit and debt processes, leading to avoidance of excessive debt;
4. The ability to maintain reasonable accounting of one’s financial resources;
5. The ability to understand and manage one’s personal assets, either using basic investment procedures and principles oneself or to delegate these actions responsibly to appropriate advisors; and
6. The ability to generate income for spending needs if additional resources are required or desired beyond trust distributions; and
7. The ability to use of a portion of one’s income and/or financial resources to support charitable activities of one’s choosing.
Appendix A attached hereto is intended to provide the Independent Trustee and the beneficiaries with objective and transparent criteria for evaluating each of the seven skills.
It is important for the Independent Trustee to recognize that these skills are commonly developed to varying degrees for most people, with few people possessing all of the skills at a proficient level. These are offered here as a useful basis for evaluating a beneficiary’s development of maturity, judgment and ability to handle wisely the funds to be distributed by the Trust.
After taking into consideration the extent to which a beneficiary demonstrates the financial literacy skills described above, the Independent Trustees may accelerate the ages at which a beneficiary becomes sole trustee of some or all of the principal of his or her trust if, at such earlier date, the Independent Trustees determine that the beneficiary has the maturity, judgment and ability to serve as such sole trustee and that serving as sole trustee is in his or her best interests. The Independent Trustees may postpone the age at which a beneficiary becomes sole trustee of some or all of his or her trust if, at the time the beneficiary would otherwise become sole trustee, the Independent Trustees determine that the beneficiary does not have the legal competence or the maturity, judgment and ability wisely to administer his or her trust or that becoming sole trustee would not otherwise be in his or her best interests.
Making mistakes with money is an important tool in learning to manage money. Beneficiaries should be allowed to take reasonable risks with money as they receive income or distributions. A goal is for the beneficiary to develop skills in risk assessment, risk capacity, and risk tolerance as well as to learn from both success and failure. The Independent Trustees are authorized and encouraged to assist the beneficiaries by acting as experienced mentors offering practical advice, support, and assistance, e.g., developing and managing business plans for new ventures, or by retaining and compensating experts, coaches, financial advisors and others to provide such practical advice, support and assistance.
The Independent Trustees should allow the beneficiaries to encounter the consequences of their decisions. Because the Independent Trustees are instructed to allow flexibility in administration of each beneficiary’s trust, they may neither be held liable for poor decisions on the beneficiary’s part nor responsible for not having foreseen unanticipated consequences of their decisions.
Disagreements on the part of the beneficiary and the Trustees, including the Independent Trustees, should be seen as normal and an opportunity for learning by all parties. Both the beneficiary and all Trustees are encouraged to approach conflicts with a desire for collaboration, mutual understanding, negotiation, and demonstration of mutual respect so that conflicts are accepted and resolved using the highest principles of human relationships.
Many conflicts between beneficiaries and trustees arise because the beneficiaries have never read and do not understand the trust, including the rights and responsibilities of both the trustees and the beneficiaries. The Trustees should seek opportunities to educate the beneficiaries and the beneficiaries are urged to learn about the terms of the trust and the respective rights and responsibilities of the beneficiaries and the trustees. The Trustees are encouraged to retain consultants to assist the beneficiaries in understanding the trust and in developing the financial literacy skills described above. Such consultants may be retained to work directly with the beneficiaries, to provide advice and counsel for all Trustees, as well as for the Guardians of any minor beneficiaries, or both.
Among the issues that such education should include are the following:
1. Understanding the purpose statement contained in this Section and any related letters from the Settlors and/or videos.
2. Understanding the respective rights and responsibilities of income beneficiaries and remainder beneficiaries.
3. The Trustees’ responsibilities with respect to both distributions and investment of trust assets, including the Trustees’ duty to treat both income beneficiaries and remainder beneficiaries impartially, as well as the duty to maintain the purchasing power of the principal while providing a reasonable distribution rate to the income beneficiaries.
4. The basics of modern financial theories of investment and the asset allocation of the trust.
5. The basics of trust accounting, so that the beneficiaries will be able to read and have a reasonable basis to evaluate the accountings prepared by the trustees.
6. Basic principles of trustee compensation, as well as compensation to all other regular advisors and consultants.
7. The importance of participating in educational sessions and becoming financially literate.
When providing educational programs for the beneficiaries, the Trustees are to keep in mind the people learn in different ways and at different speeds. Various assessment programs exist which will help the Trustees identify how the beneficiaries learn and to make certain that information is provided to them in a manner tailored to their individual learning styles. Such assessment tools include those which help to identify how we receive, process, assimilate, store and use information, and career or vocational testing which held to identify the beneficiaries’ unique individual talents and interests. The costs of all such assessment tools shall be charged against the trust estate and prorated ratably against the various trusts created hereunder.
