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Estates & Wills & Trusts, Tax

Vital to consider human side of trustee-beneficiary relationship

While it's important to pay close attention to the financial and legal responsibilities associated with a trust, trustees should also be aware there's an important human element to their relationship with the beneficiary, Calgary tax and fiduciary services lawyer Dennis Nerland says in a recent Caregiving Matters podcast.

As Nerland, a founding partner of Shea Nerland Law and leader of the firm's tax and estate planning practice, says in the interview, a trust is not actually a legal entity at all, but a concept that has its roots in ecclesiastical conscience, going back 1,000 years to the time of the Crusades, when landowners who went to fight would transfer the title to their property to someone they trusted.

“It’s really a relationship between, in the Court of Chancery’s eyes, the legal titleholder and the true beneficiary of the property,” says Nerland.

“The trustees have fiduciary obligations to the beneficiaries, and the property or assets which are held by the trustee for the benefit of the beneficiaries are ring-fenced," he says, which means that they don’t show up on either the trustee’s nor the beneficiary’s balance sheet.

One of the most important aspects of a trust, says Nerland, is that it is adaptable to any circumstance.

“The assets are ring-fenced, so it's actually a very good vehicle to utilize to protect assets against the vagaries of the external world  so against creditors and failed marriages,” he says.

“There are a number of interesting income tax strategies where taxes can be deferred."

For example, says Nerland, a trust is a popular vehicle to facilitate an estate freeze. A trust is also a useful vehicle to protect against U.S. estate taxes. A simple example of that would be a Canadian owning U.S. property would be potentially subject to U.S. estate taxes. If the property is held in a special residence trust, those U.S. estate taxes would not be exigible at death.

“Other common uses would include health, education, maintenance and support trusts for minor and dependent children in the event that parents pass away early,” Nerland explains.

“Because the assets are held in a suspended animation in a discretionary trust, we would posit that they actually provide the best protection of assets of any creation out there," says Nerland.

A trust is also incredibly flexible and adaptable, he adds, and is a private document as there’s no public trust registry, so it provides maximum confidentiality.

In Canada, Britain or in the United States, they also provide significant tax advantages, adds Nerland.

At the same time, he says, “If advisers and clients or users of trusts think about trusts in the classical notion of really being this concept of fairness, a relationship rooted in ecclesiastical conscience, where the assets are held in suspended animation, where they’re ring-fenced, that’s the proper way to think about a trust. If you lose sight of that, if you start thinking of it as a legal vehicle, all sorts of bad results or incorrect results can happen.”

The most important consideration in establishing a trust, says Nerland, is the choice of trustee.

“If you get the right trustee there’s huge value, and on the downside, if you get the wrong one, you actually risk wrecking the beneficiaries, wrecking the family,” he says.

The universe of choices for trustees, he says, are family members, friends, business associates, professional advisors, professional trustees and institutions.

Although an excellent trustee can’t guarantee results, they can guarantee best processes, says Nerland.

The qualities to look for in a trustee who’s going to have a long-standing position guarding assets for your kids over time, for example, would be someone who collects all the evidence and is inquisitive, exercises good judgment, knows a conflict when they see it, can make the hard decisions, is empathetic, good at tax, finances and accounting, a good communicator, respected in the business community, and understands the family and the beneficiary’s needs, he says.

It is also important, Nerland says, for the trustee to “know what they don’t know” — to hire advisors, lawyers, accountants or investment advisors if they need to.

With the current governance standards focusing on the legal, administrative, investment and tax efficiency functions of the trust — essentially, the financial relationship between the trustee and beneficiary — Nerland says the human side of the trust is often overlooked.

“Trustees are, right now, focused on process, financial process, they’re focused on the duties of loyalty, impartiality, prudence, and protection of the trust property. They’re a lot of times, focused on not making mistakes, not getting sued, so playing defence, in my terminology,” he notes.

However, he adds, there is a problem with this thinking, and the solution lies in reprioritizing the relational over the financial.

“In the future, the best practices I see would be to establish a distribution policy and a committee that would actually dig into the family and understand their needs.

“The current bar of excellent processes around all the financial matters cannot be actually lowered, it has to stay at its same high level, even get raised, but the new higher bar of excellent processes [revolves] around relational matters, which I call fiduciary character.”

For trustees, he says, this would involve doing no harm, fidelity — standing by one’s word, making good decisions and operating at the highest bar of integrity — regency, being discerning and having the courage to not just write distribution cheques to the beneficiary, but to sometimes show them a way forward that doesn’t depend on the money.

Ultimately, says Nerland, communication is the key to a successful trustee-beneficiary relationship, via a formal process that includes regular meetings in a professional setting with an agenda, minutes, to-do lists, and accountability scorecards.

But after the business meeting, he says, beneficiaries and trustees should be sure to schedule social time to get to know each other, build comfort and trust.

“Without trust, you won’t have a successful trust,” says Nerland.

To Read More Dennis L. Nerland Posts Click Here
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