WHO IS KEEPING AN EYE ON THE BENEFICIARIES?

25.05.2021
BY SIMON REED, EXECUTIVE DIRECTOR
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It’s said that families can be a bad investment. This isn’t to say that having children is a bad idea of course, but giving them too much money, at too young an age, can sometimes be problematic.

It has also been said that, as family wealth is passed down, it is completely lost by the third generation. Whilst this is not by any means always the case, the idiom’s lesson still has some semblance of truth in it, a warning light for anyone thinking of passing down their wealth to those who are unprepared.

It is this preparedness that is the essential part. Being the beneficiary to a significant amount of wealth can be overwhelming and confusing, especially when it happens at a young age. Without proper guidance and support, it can lead to poor decisions, no matter how well-intentioned.

Then there is the flipside: when knowledge of outsized wealth or an inheritance too early in life leads to the adoption of a care-free and, at times, reckless lifestyle.

Trust in the trustees?

All of this leads us to ask: who is keeping watch on the beneficiaries?

This is an important question, but the answer is complicated. You might think it is the trustee’s duty to supervise the beneficiary, but that isn’t technically the case. The trustee’s job, in simple terms, is to safeguard the trust assets and ensure they are managed in accordance with the settlor’s instructions and in the interest of the beneficiary. This includes appointing investment managers, keeping records, making sure the trust is being managed in line with current laws and regulations. It also means providing information about the trust’s assets to the beneficiary when requested, as this is one of their responsibilities.

So far, none of this suggests that the trustee has a duty to watch over the beneficiary’s behaviour, whether good or bad. Or do they? Let’s leave to one side the prospect of bad behaviour and instead think of it in a more positive light – that the beneficiary might need financial education and robust advice on what to do with the trust’s assets.

If the trustee has a duty of care and must also manage the assets in accordance with the settlor’s wishes, then there is a strong argument that this includes educating the beneficiary and helping them to understand more about the wealth they are about to inherit. This may involve bringing in the trust’s investment manager to explain how the portfolio is managed, how to make sound investment decisions and so on. The objective is to provide the foundations of a financial education and build confidence in money-related decision-making.

All in the family

Where the education process needs to begin is within the family, if possible. For families that pass down wealth through the generations, there is a tendency for them to believe they are the custodians of the family’s assets and it must be preserved for the next generation.

Depending on how the trust is structured and the makeup of the family, the way to ensure a favourable outcome is to begin financial education at an early age. If left too late, or not done at all, there is less opportunity to get it right. The earlier a family begins talking about finances, the better the long-term outcomes.

The bottom line is that it is important for families to educate and encourage responsible financial behaviour. It’s true that some parents make a conscious decision not to reveal all the details about the family wealth as part of an attempt to motivate their children to cut their own path in life. But if this is the case, it makes even more sense to teach them about making sound financial decisions, as it will put them in a strong position to make it on their own.


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Disclaimer: The value of investments and any income from them can fall as well as rise and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not indicative of future performance. The material is provided for informational purposes only. No news or research item is a personal recommendation to trade. Nothing contained herein constitutes investment, legal, tax or other advice.

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