How trust beneficiaries can navigate disputes

Being a beneficiary of a trust is often a fortunate position to be in. But inheriting wealth can sometimes come at a cost. While a beneficiary may suddenly find themselves free of financial concerns and empowered to support passion projects or charitable causes, they may be inheriting more than just money.

Having worked hard to build a future for their family, wealth creators (typically referred to as “settlors”) tend to hold strong views on how their assets should be managed, both during their lifetime and after they have passed away. Yet beneficiaries from younger generations may see things differently.

By way of example, beneficiaries may seek to distance themselves from wealth derived from fossil fuels because it is contrary to their personal ideals around sustainability. They may even wish to remove association to the wealth altogether by suggesting their ‘share’ of the wealth be donated to a cause they are passionate about. These types of reactions to wealth can lead to conflict with the wealth creator.

“Beneficiaries’ conflict with wealth creators can be a difficult issue to manage from a family point of view,” says Chris Nutter, associate director at RBC Wealth Management’s Fiduciary Specialist Team in the British Isles. Decisions that impact personal lives tend to spark contention within the family, and it’s difficult for families to reach a resolution because these conflicts are often fuelled by emotion. Introducing a third party to mediate these conflicts is sometimes the only way to reach a solution.

Another common source of conflict can be divorce. “When compared to previous periods, divorce rates are high,” Nutter explains, with 113,505 divorces granted in England and Wales in 2021 – a 9.6 percent increase over 2020 figures . “Many people today are realising their marriage is not what they want; they’re living to enjoy life and making decisions based on now,” he says. “This can leave wealth creators concerned that the money they made during their lifetime could get embroiled in divorce settlements.”

The relationship with the wealth creator is not the only cause of disputes involving beneficiaries. Disharmony among the beneficiaries themselves can also occur.

Nutter and RBC Wealth Management’s Fiduciary Specialist team recently worked with a family in the British Isles where a settlor had established a life interest trust to support their grandchildren’s education. They had expressed their wishes to the trustees who were responsible for impartially managing all assets placed in the trust on behalf of the beneficiaries.

The settlor had three children, however only two of the three children had children of their own. Following the deaths of the settlor and his wife, the third child, who had not received support from the trust in the same way as their siblings up to this point, i.e. to support education for their children, approached the family and trustees to seek compensation to ensure they received their ‘fair share’ from the trust. This resulted in difficult conversations amongst the three siblings, but was ultimately managed by the trustees who could remove themselves emotionally, and help find an agreeable solution that worked for all parties (including the deceased settlor and his wishes).

The cost of conflict

If these fractures are allowed to form into fault lines, families should brace for potentially disastrous consequences, including strained relationships and assets being split at the behest of the beneficiaries – or the courts – and losing value in the process.

If the conflict does lead to litigation, it’s likely to be damaging and counter-productive, whatever the result.

Julie Kleis, director of RBC Wealth Management’s Fiduciary Specialist Team in the British Isles, highlights a situation she has seen unfolding over the past decade, where a family has lost millions in legal fees.

“Litigation can come at a huge cost to the trust fund,” she says. “If the trustees spend millions on fees, that money isn’t available to the beneficiaries or their children. How can that benefit anyone?”

Trust beneficiaries can also feel a great deal of emotional pressure from inheriting significant wealth, and not just pressure from their families. RBC Wealth Management’s 2022 survey of 600 high-net-worth individuals found that 80 percent of respondents aged 25–34 wanted guidance about the responsibility and emotion of having wealth.¹ Beneficiaries can feel overwhelmed by the responsibility of having wealth, a sense of shame and guilt, and fear of being dismissed by their peers as a “trust fund kid.”

That being said, they also have an integral part to play in the resolution of conflict.

How beneficiaries can limit conflict

The key to limiting conflict as a beneficiary is not a perfect science; however, it certainly helps to be open and honest in all communication with the settlor, trustees and other beneficiaries.

If beneficiaries are clear about their goals, values and priorities, this can help provide clear guidance to wealth managers and other members of the family. They should also actively listen to points of view from other members of the family to try and understand why they’re making their requests.

“It’s an ongoing dialogue, and usually a long process,” Nutter says. “The beneficiaries are going to have to work at it in order for the process to work; but at least they’ll know what each other wants to achieve, and where everybody sits.”

The most challenging part for beneficiaries? The fact they will need to compromise.

“Sometimes people don’t understand that they are part of a bigger picture,” says Kleis. “That it’s not just about them in isolation.”

The trustee/beneficiary relationship: A two-way street

Trustees play a vital role in managing the conflicting opinions and wishes of beneficiaries. As stewards of the trust’s assets, their goal is to ensure the trust’s wealth is preserved and used for the greater good.

This can mean having some difficult conversations, explains Nutter. “If we take the example of the wealth creator who fears that changing attitudes towards marriage may lead to costly divorce(s), it’s not unusual for the trustees to be asked to take on the sensitive task of telling the wealth creator’s children to sign a prenuptial/postnuptial agreement.”

As for the example of where the settlor wanted to utililse the trust to support their grandchildren’s education, the trustees were asked to handle the conversations with the three children if an issue ever occurred. In the wake of their mother’s (the settlor’s wife) passing, the trustees met with the beneficiaries and reached a solution ensuring everyone felt they had received equal benefit, while still adhering to the life tenants’ wishes.

All too often, however, beneficiaries lack a proper understanding of what a trust is for and how it works. “Many don’t seek to find out, either,” says Nutter. This can lead to unrealistic expectations and challenging conversations with their trustees.

“Beneficiaries often think it’s a bank account,” Kleis says. “They may ask why the trustee is taking money or standing in their way.”

While trustees own the assets and have ultimate control over what happens to them, they are there to offer beneficiaries advice and support, to encourage their ideas for how to use the wealth, and to help them get what they want from the settlement – as long as it aligns with the principles and direction provided in a letter of wishes by the settlor, and the long-term sustainability of the wealth.

Yet unlike a company or a foundation, a trust is not a legal entity; it’s a relationship. And like any relationship, it requires open and honest communication.

“I always tell beneficiaries to pick up the phone and talk to us,” says Kleis. “As trustees, we want to help them. This is their family wealth, and it’s there to be used. By working with us openly and honestly, we can find the best way of passing it from generation to generation to benefit them and their family.”

¹ Survey conducted by Kantar on behalf of RBC Wealth Management in October 2022. Respondents consisted of 600 high-net-worth individuals (minimum investable assets of £500,000) based in the UK.

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