James E. Hughes, Jr. and Vaughan Scott
For family businesses and enterprises, the dynamic preservation of the many forms of capital that wealthy families of affinity have is a critical function. In addition, ensuring the smooth transfer of leadership and ownership from one generation to the next can be a challenge. However, it’s a challenge that can be better managed when one understands the roles of both a typical trustee and a Trustee with an uppercase T. A Trustee is one who serves the greater good of families holistically, universally and unwaveringly.
In order to fully understand the responsibilities that are carried out by either Trustees or trustees, it is first important to know the difference between moral and natural philosophy. Stated most simply, it is the authors’ belief that moral philosophy applies to the “why” — Why are these things important? and that natural philosophy applies to the “what” and the “how” — What are the things that we must do? How are we going to carry out our responsibilities?
While trustees only serve trusts, Trustees serve families much more broadly. As we know, trusts are often very complex structures. Most importantly, they are as our co-author and special friend, Jay Hughes, has written previously, “gifts of love” given by a grantor, usually a parent or grandparent, who has the necessary documents drafted. The grantor also names a beneficiary or beneficiaries, the person(s) who will benefit from the trust, as well as a trustee(s) who is/are responsible for carrying out the duties specified within the trust documents.
In addition to understanding the relationship between the parties identified in trust documents (grantor, beneficiary or beneficiaries and trustee(s) and the difference between moral and natural philosophy and how they apply to being a Trustee/trustee, it is also important to understand the various legal responsibilities and fiduciary duties that exist for the trustee(s). A trustee must always endeavor to carry out his or her duties to the best of their abilities. These fiduciary duties not only present themselves when one is serving as trustee, but they may present themselves in one or more of the following roles/contexts that Trustees find themselves fulfilling: overseeing assets (both liquid and illiquid); serving on a board of directors; and/or being a responsible shareholder (especially a majority shareholder).
The formal codes or laws related to fiduciary duties can be found in the Uniform Trust Code (US), the Trustee Act 2000 (UK), the Trustee Act 1925 (Australia), or the Trusts Act 2019 (NZ). These duties can include: duty of care, duty of loyalty, duty of impartiality, duty of obedience (to act lawfully), duty of good faith, duty of disclosure and duty of confidentiality. Bear in mind, specific laws as they relate to each of these duties varies by state and country; however, their general meanings, as paraphrased below, and their applications are fairly universal.
The duty of care is met by ensuring one has all the resources needed for sound decision-making. This can include, but is not limited to, proper due diligence, accurate information and people who have sufficient experience (or who have sought proper independent counsel from those who do) to make critical decisions. Please note: ultimately, caring for the beneficiaries is the only way to adequately fulfill this duty.
The duty of loyalty is satisfied by ensuring that conflicts of interest are avoided whenever possible, but if conflicts do arise they are addressed transparently with all stakeholders. Ultimately, if stakeholders are going to be impacted in a negative way, then a trustee must withdraw from participation in one activity over the other(s) as the duty of good faith (below) also applies.
The duty of impartiality requires that one be subjective as it relates to the well-being of the beneficiaries, while remaining objective to any beneficiary’s needs. Please note: it is the authors’ belief that few, if any, parents would be able to fulfill this duty adequately and fully.
The duty of obedience requires that fiduciaries not only follow state and federal laws but whenever applicable they also follow the by-laws, operating agreements and shareholder agreements that are set forth in corporate documents.
The duty of good faith assumes no trustee will undermine or eliminate the ability of another party to an agreement or a shareholder to have the benefits that others in a similar position enjoy.
The duty of disclosure requires that all material information, including real or perceived conflicts of interest, is disclosed on a need-to-know basis. However, it is important to also recognize that anything that one fails to disclose voluntarily will likely come to light should a formal legal process ensue.
The duty of confidentiality requires that only those who have a legal right to information and those who have been properly authorized (typically accountants, attorneys and other trusted advisers) are able to gain access to sensitive information.
In addition to always being mindful of these duties, a trustee in his or her role as a fiduciary has three basic responsibilities and functions: administration, investment and distribution.
Administration requires helping to keep assets divided properly among beneficiaries and/or other owners. Investment involves managing a pool of more liquid assets such as stocks, bonds, mutual funds, ETFs as well as less liquid assets like venture capital, private equity investments and limited partnerships, while protecting income and working to outpace inflation. With regards to the distribution function, the fiduciary handles the distributing of income and tax payments to beneficiaries.
Trustees and trustees both view administration very similarly. However, a Trustee sees investment as dynamic preservation and only views distributions as being a means to life enhancement, while never focusing on distribution singularly.
Additional services offered by a trustee may include dealing with legal and compliance issues related to a trust. Examples of a trustee would be a trust company or a bank. As is hopefully apparent, a trustee typically only considers the “what” and “how” questions (natural philosophy) without endeavoring to contemplate the “why”. For them the truths always and singularly lie literally in the words of the documents and never in the intent. And, despite often suggesting that as trustee they will operate businesses owned by a trust after a grantor’s passing, they typically will only do this long enough to get the business sold. This approach is somewhat understandable because trustees have grave concerns regarding the potential litigation that may ensue if they falter in any way relating to their three main responsibilities: administration, investment and distribution.
While the expertise provided by a trustee is reassuring and helpful when it comes to taking care of the more basic business functions related to trusts, it is also critical to understand the beneficial role of a Trustee. This person not only fulfills any responsibilities in their role as a trustee, but also concentrates on the well-being of any enterprise(s) owned by a family or trust. Additionally, they work to ensure the well-being of all stakeholders (including the family), team members and the community.
Often the Trustee’s more omniscient view of their responsibilities is an overlooked piece of the puzzle, but it is much needed in order to create the invaluable processes that will lead to family members making good, joint decisions.
A Trustee is also concerned about some of the same or similar things that a trustee must address. They both approach administration in a similar way: How do we properly account for each beneficiary or owners’ respective interest or share(s)?
However, the differences begin to appear when we start to consider investments. As stated previously, the Trustee approaches investment as dynamic preservation. Not only are they mindful of managing both liquid and illiquid assets, but they must also ensure the family’s enterprises have the necessary capital (in all its forms). At the same time, because the rate of change is accelerating and the road ahead can be uncertain — socially, politically and economically — it is the authors’ belief that Trustees will continue to rely more heavily upon clarity over certainty throughout the decision-making process.
Trustees must also ensure that investments of time, talent and treasure are made in supporting the non-financial forms of capital (human, intellectual, social and spiritual), not only for families, but for their enterprises and all their stakeholders. In fact, Trustees are committed to investing at least as much effort in these capitals as they do in managing “the money”. This commitment is important to the enduring well-being of any family of affinity.
Although Trustees may approach investment quite differently than trustees do, it is crucial that Trustees never allow themselves to become overwhelmed by the first two functions at the expense of the third. And when dealing with the third function, instead of focusing solely on distribution, Trustees are focused much more holistically on life enhancement. They ask questions like: How do we develop stakeholder owners? How do we simultaneously create and preserve wealth (dynamic preservation)? If a Trustee is to fulfill his or her duties properly, they must expend 50% to 60% of their time and effort working on life enhancement and 20% to 25% of their time on each of the other functions (administration and dynamic preservation). Again, bear in mind that where trustees are focused on investment and distribution, Trustees instead focus on dynamic preservation and life enhancement, which do include investment and distribution, but are much more holistic in their approach.
Rather than only concerning themselves with how they are going to fulfill their responsibilities today, Trustees focus on creating an environment that fosters the growth and development of everyone around them, including every family member, team member and stakeholder. The by-product of this should be enormously valuable, including the identification and development of others who will assume and carry out their roles as Trustees in the future. Trustees can create these nurturing environments and ecosystems by constantly asking themselves and others the “why” questions (moral philosophy) and then moving onto developing the “what” and the “how” more holistically as they relate to fulfilling their responsibilities of administration, dynamic preservation and life enhancement. By doing this, Trustees develop a process of learning and a system that drives sound joint decision-making, which not only serves their family of affinity, but also serves humanity.
Family of affinity — A family that does not limit its sense of identity to blood or genetic lineage. It sees itself as linked by a common mission and a sense of “differentness”. It recognizes the paradox that acting altruistically — for the sake of others’ good — is key to the family’s own well-being.
Human capital — The human capital of a family consists of the individuals who make up the family. Their human capital includes their physical and emotional well-being, as well as each member’s ability to find meaningful work, establish a positive sense of identity and pursue his or her own happiness.
Intellectual capital — The intellectual capital of a family is composed of the knowledge gained through the life experiences of each family member or what each family member knows. Some signs of intellectual capital include family members’ academic successes, career growth, artistic achievements, their understanding of their individual and family finances, and their ability to teach and learn from each other about what they know.
Social capital — Social capital refers to family members’ relationships with each other and their communities. No family exists without some social capital. Some key indicators of it include the family’s ability to make thoughtful, shared decisions together; to welcome new members into itself; and to give of itself — in time, talent and treasure — to the larger society of which it is a part.
Spiritual capital — Spiritual capital is the family’s ability to share and sustain an intention that transcends each member’s individual interests. Sometimes that shared intention is described as a shared dream. This capital is not necessarily equivalent to a family’s religious beliefs or traditions, though such a tradition may express and nurture spiritual capital. No family begins the journey of family wealth without some sort of shared intention, that is, without some form of spiritual capital. Spiritual capital includes humility — the recognition that this journey is fraught with challenges and exceeds the strength of any one of us alone. It also includes gratitude toward those with whom we share the journey, those who came before and those who will come after us.
James (Jay) E. Hughes, Jr. is the author of Family Wealth: Keeping it in the Family; Family: The Compact Among Generations and co-author of Family Trusts: A Guide for Beneficiaries, Trustees, Trust Protectors, and Trust Creators. He is a retired counselor-at-law and lives in Aspen, Colorado.
Vaughan Scott is the CEO of Axiom Financial Strategies Group, a registered investment advisory and family enterprise advisory firm, based in the United States. Vaughan is also an instructor in the Family Firm Institute (FFI)’s Global Education Network (GEN) where he teaches GEN202: Family Wealth. He’s also a FFI Fellow and serves as the Director of the accredited, online MBA Certificate in Family Business Management and Advising offered through the University of Louisville’s College of Business graduate programs.
1 Source: James E. Hughes, Jr., Susan Massenao and Keith Whitaker, Complete Family Wealth: Wealth as Well-Being, 1st edition (Hoboken, New Jersey: John Whey & Sons, Inc, 2018).