In this conversation, Frazer Rice and PAUL HOOD delve into the evolving role of trustees, particularly in the context of Delaware’s new Well-Being Trust Statute. They discuss the broader responsibilities of trustees beyond mere asset management, emphasizing the importance of understanding beneficiaries’ needs and the implications of well-being provisions. The dialogue highlights the challenges trustees face in balancing the interests of multiple beneficiaries, the potential liabilities associated with well-being services, and the necessity of having clear processes in place. The conversation concludes with reflections on the complexities of trust management and the importance of careful drafting in trust documents.

https://youtu.be/9LFt6HsjpWM

https://open.spotify.com/episode/4uqhoeXtfaIIWLbKhd62ej?si=nDTf-09bRSWjT0O_YKX49g

Takeaways

Trustees have a broader role than just managing assets.
The well-being statute in Delaware is an opt-in provision.
Balancing the needs of multiple beneficiaries is challenging.
A clear process is essential for trustees to navigate their duties.
Well-being provisions can complicate traditional trust structures.
Trustees must be cautious about the liabilities they assume.
Decanting trusts can lead to unintended consequences.
The intent of the settlor is paramount in trust management.
Trustees should document their decision-making processes.
Effective communication with beneficiaries is crucial.

Sound bites

“I would never opt into 3345.”
“Decanting is not that easy.”

Well Being Trust Chapters

00:00 Understanding the Role of Trustees
04:45 The Concept of Well-Being in Trusts
10:33 Balancing Beneficiary Needs
17:53 Navigating Well-Being Responsibilities
24:30 Challenges and Considerations in Trust Management

Well Being Trust Transcript

Frazer Rice (00:01.078)
Welcome aboard, Pop.

Paul Hood (00:02.648)
Great to be with you today.

Frazer Rice (00:04.598)
The Delaware legislature has tried to give us some new tools to give us a holistic approach to planning for trustees and for beneficiaries. Help us sort of think through first from a function perspective what trustees do. I always thought of it as, you know, they held assets for the benefit of beneficiaries and then with that they have to administer them, they have to invest them, and then they have to distribute them. Have we got that about right?

Paul Hood (00:35.34)
Well, I’ve always had a broader view of trustees. Jay Hughes, a good friend and fellow pilgrim in this field, he talks about the trustee as a persons with confidence and like a trainer, an elder, and for a lot of beneficiaries, and I believe trustees, especially in discretionary trusts,

The trustee needs to be that. There needs to be some attention to the person of the beneficiary, not just the finances. Send us a budget. The distributions committee who’s in secret will meet, and we’ll decide how much we’ll give you.

Well, I think a trustee’s duty is broader than that. Or let’s say this, you can meet the minimum requirements of being a trustee by doing what you said, but I think the very, very best trustees are persons with confidence.

Frazer Rice (01:41.17)
I agree with that. The problem is identifying the people who mix the temperament and the talent and then paying for them. So to that end, with those different functions, the world of bifurcation came about. Directed trustees where people got to be good at certain things. Maybe you had a good investment person, you had someone who was with the family who understood the dynamics from a distribution standpoint.

and then the administrative side making sure the I’s are dotted and the T’s are crossed as far as the administration’s concern. How do you view that in the evolution of the trustee function?

Paul Hood (02:17.612)
Well, it’s interesting because I haven’t been in practice.

since well the 20th anniversary of Hurricane Katrina is August 29th of this year. My life changed that day. I didn’t know it but it did. And I left Louisiana. So I haven’t practiced law in 20 years but I remember the directed trust percolating up and it was driven by the investments. People wanted the bank trust or the institutional trustees but they hated their investment performance.

So the compromise was, okay, we’ll reduce our duties because the bugaboo was always whether it was a proper delegation of investment authority. The trustee could still be held liable for what if the court thought it was an improper delegation, okay, or oversight of the delegation.

They started out investing right, but then they got real heavy in crypto and foreign flips. you can go there. So we’ll take fewer basis points, but we don’t have the liability for that. That liability is not delegated. We have segregated it. But enter the Wellbeing Trust, and this is only true in Delaware in the Wellbeing Trust statute because it’s an opt-in. Once you opt-in, you are required, the trustee and all the advisors are required to perform that those well-being, provide those well-being services. Now the question is who is responsible for providing them.

Frazer Rice (04:16.891)
Let’s step back for a second. The well-being provision, which is designed to give the trustee the tool to promote, improve, advance the well-being of the beneficiaries, which I think we can agree is a good thing in concept. What do we think of well-being as being? How is it defined? And what part of the function is it taking from the trustee’s perspective?

Paul Hood (04:45.228)
Well, I’m going to default back to, I think it was Potter Stewart who said he knows pornography when he sees it. I think that’s the same with well-being. I think things are either obviously well-being related and are not. And there’s a continuum of them. But the whole concept, I think it’s just pretty much to promote the betterment, the improvement and the just the the maintenance personal maintenance of a trustee i mean of a a beneficiary

Frazer Rice (05:26.269)
So how do you think about it from a trustee’s perspective when there are multiple beneficiaries and maybe the wellbeing for one is not the wellbeing for another? Very often a trustee has to balance a lot of different equities and I don’t mean that from a stock perspective, sort of taking care of one possibly at the expense of the other with the trust’s assets. How does the new statute in Delaware address that?

Paul Hood (05:54.222)
Well, and you raise an excellent point. what you said, you were talking about equities, okay? What it really is, is the trustees duties. And the big one is the duty of impartiality. And arguably, the 3345 statute, and I’ll call it that, that’s the wellbeing statute. That’s the opt-in. They have another one and it is to provide, it’s an immediate power. It was added to 3325 as number 32 in the Delaware trust code.

And it allows almost the same things. It empowers trustees, now not the advisors. It doesn’t say anything about the advisors in that statute. Whereas 3345 includes, and remember in Delaware an advisor is like the trust protector and the administrative trustee, that kind of thing.

They call them advisors. I don’t favor that language because I believe that they should all be fiduciaries. So I call them trustees because I think in the end they’re going to be held, especially if they’re professionals, they’re going to be held to that standard as it is. But that statute was immediate when the law went into effect. So they’re authorized to provide those services now.

For me, would provide, I would never opt into that statute. Because why do you want to take on a mandatory duty that’s unclear?

Frazer Rice (07:30.12)
That’s it.

Frazer Rice (07:34.908)
Yeah, it sounds like a Roach Motel where you get in but you can’t leave. That’s right. That’s right. So if you were to encounter one of these trusts in the wild and you’ve got multiple beneficiaries, but let’s say three, one of them needs a lot of help. Another one could use the help and then the other one is completely self-sufficient. How do you…

Paul Hood (07:40.35)
Eagles Hotel, California. You can check out anytime you like, but you can never leave.

Frazer Rice (08:02.693)
sort of build a process around that so that you are being impartial but you are invariably taking away from potentially the corpus of the trust in order to effectuate different goals as they develop for these beneficiaries.

Paul Hood (08:16.782)
Well, it obviously starts with the settlors intent. And it’s the settlors intent first as set forth in the instrument. However, because this is not a court case where you’re construing, because I I used be an expert witness, know, construing, you know, problematic clauses in operating agreements, trusts, wills, whatever.

You, you, you, you construe that including more information you investigate. The trustee, let’s look more, because you look at the language and well it would authorize it here, but let me find out a little bit more. If the settlor is still alive, I would at a minimum also talk to the settlor, okay?

Also, if he or she is not still alive or sentient, I would investigate. I would talk to other people. I would make that into a process so that when you’re questioned down the road, here’s my process. Anytime you have a process, you’re better off.

When all that planning was done in 2012, you know, and we filed more gift tax returns. I was the only guy in the country saying, don’t. put your marginal wealth clients into anything big, irrevocable. I said, because I think this is gonna work itself out. And for six hours, I was wrong on January the 1st, 2013, but there were lawsuits.

And Jackson versus Colon was one of the cases and poor Colon, the lawyer got sued. because he didn’t have a process for evaluating whether his client had put too much or had retained sufficient assets after they did this planning. So it’s all about a process in the end. So instrument, settlor, and I would investigate and I would wrap it up into a process that was documented.

Frazer Rice (10:36.848)
So if I’m a clever beneficiary, I look at something like this and maybe if there is a HEMS standard, which made it imprudent maybe for the trustee to disperse assets to me, I might go to a wellbeing component of a trust and say, well, you know, maybe this is something that I could petition the trustee for assets. Is that an area of concern for you or is this something where those are two different things entirely and therefore not particularly related.

Paul Hood (11:10.998)
I think the latter. Well, first of all, obviously every beneficiary trustee relationship is different. And it’s governed first by the trust instrument. What is the beneficiary entitled to from a standpoint of distributions?

You know, do they get an annuity? Do they get a unit trust amount? Do they get fiduciary accounting income? Are they only a discretionary beneficiary of principal and or income? You have to look at all of that. So if it’s something that isn’t covered, well then, you know, the answer’s probably no. Because while I think that the well-being provisions are similar to him’s, they’re not identical. And that would concern me. And that’s if I was drafting it.

I would not allow the trustee if it was subject to a HEM standard. And I’m not a big fan of HEM standards. I think they expose you to asset protection, problems. There a lot of things. And I’m just not a fan of it. I like wholly discretionary trusts or unit trust, annuity trust distributions. Easy or hard.

That kind of thing. for me, the well, and particularly if it’s an interested trustee, I would define it so it cannot, whatever wellbeing power is exercised stops at the Hems line, the Hems County line. It cannot cross over because then you’ve got a state, know, of course, if there is a state tax problem.

Frazer Rice (13:08.216)
Right. No, and to that end, you know, I was thinking about this as we were sort of leading up to this today. And, you know, from a prenuptial planning standpoint, I would think the well-being clause would frustrate sort of prenuptial planning with regard to the assets of that particular trust, because a good family lawyer would take a look at that and say, well, you yes, there may be discretionary elements that the trustee has, but overall of the well-being sort of transports not only to you, but maybe the rest of your family slash kids, that that should be part of negotiation in a divorce settlement. Is that something that’s popped into your head or am I fantasizing poorly?

Paul Hood (13:50.386)
Doesn’t that undercut the holy discretionary nature of the trust? And I don’t see how it doesn’t. Do you?

Frazer Rice (14:28.612)
No, it’s mandatory, it’s “shall” versus “may”, those two words are important. They’re important in other parts of law too.

Paul Hood (14:39.278)
Well, and the statute uses, the statute uses shall.

Frazer Rice (14:44.078)
Yeah, well, I agree with you then. it’s mandatory, mandatory does a lot of things to the word discretion for a trustee’s perspective. So point taken to be sure.

Paul Hood (14:53.23)
Well, I can tell you this. If I was running a Delaware trust company today, first thing I would do is I would never opt in to 3345. Not until the legislature fixes a few things.

The directed trust, sure that whoever clarifying who’s responsible. So if you have an administrative trustee and a distribution trustee and an investment trustee, investment trustee is probably not gonna be involved, okay?

It’s going to be one or the other two. And it’s going to depend on what the service is and how it’s treated. If it’s treated as distribution, would argue that the distribution advisor is the one who has the duty and the liability. But their statute right now does not protect, or at least the 3345 statute, does not protect those in that bifurcated

All we did when we started the whole idea of this type of trust is to basically segregate because trusts are the bifurcation of legal and equitable title. Beneficiaries have equitable title, the trustees have legal title and the duties. And we’ve just subdivided

legal title and those duties. But in the statute they all seem to get melded back together, commingled in a way. So I would not if for a directed trust there’s no way I mean the trust instrument would have to be so beefed up to make sure that was clear that despite what the statute says here’s here’s what our deal is but I’d feel better if they changed the statute.

Frazer Rice (16:55.331)
So it is a practical matter. Anybody who takes these roles on, takes on, know, with great power comes great responsibility, as Ben Parker told Peter Parker. You get these incredible amounts of power and responsibility and therefore liability. is a practical matter if someone has to, has to, mandatorily deal with

the well-being component here, whether as a distribution advisor or as a full trustee. How do you get around that? mean, how do know that you’re picking the right advisors or not subjecting beneficiaries to the drug addiction industrial complex or the psychological industrial complex? And maybe a better way to put it is if you get going and you’ve made a mistake, how do you fix it or…

Can you turn it off later if the problem is solved but you have a mandatory duty for well-being?

Paul Hood (18:01.782)
Well, and that’s a great question. And your comment about the addiction complex, I call most treatment programs 28-day spin cycles. And that’s why the rate of success is so little and so low. So I get that. Yeah, how do you turn it off? And what do you do if a beneficiary says no thank you?

Frazer Rice (18:16.033)
You

Frazer Rice (18:32.216)
Yeah, that’s a good question too. I was just gonna say…

Paul Hood (18:34.796)
Well, I’ll give you another one. I’ll give you another question. What if five years from now you’ve opted in and a beneficiary says, you know, I’ve been damaged because you should have provided me this service three years ago and I’m going to sue you or try to remove you for breach of your duty to provide those services because you didn’t guess right.

Frazer Rice (19:01.291)
Right.

Paul Hood (19:01.516)
And I think that gets to where, I think that gets to your concern about all this. How’s the trustee gonna know, right?

Frazer Rice (19:08.95)
Well, and you know, knew or should have known that, you what happens if the beneficiary lies to you, which happens in tough situations like that. It’s just a brutal one. I look at that and say that, you know, when, that function is melded with larger funding and distribution functions, I, I come to the conclusion, okay, why wouldn’t, why wouldn’t you have a separate trust if the grantor wants to

Paul Hood (19:17.814)
lot of

Frazer Rice (19:38.699)
provide for the wellbeing, why wouldn’t you endow, let’s call it a self-improvement trust or something like that with extremely limited functions and distributions and segregated from the bulkier assets so that you aren’t mixing those functions and creating a real quagmire for the trustee to navigate, you know, when they’re worried about selling the company on one hand and then taking care of this on the other.

Is this too many functions delineated in the setting that we’re providing here?

Paul Hood (20:14.402)
Well, I just did a webinar for Lionbird with Jocelyn Borowski from Duane Morris. She has written about well being trusts. She and her partners and firm worked in the committee drafting. I think Todd Flubacher was on that committee. That is, she made that point.

that you either could call out a part of a trust that is limited to the wellbeing or you create sort of a sidecar wellbeing trust. And I think that’s a good idea. One thing we did not get to, and I didn’t, and it really slipped my mind to ask, are

Trustee and you’re obviously much closer to Delaware than me sitting over here in Michigan and close to Motor City. Are trustees doing anything about this? Are they implementing these types of programs?

Frazer Rice (21:19.655)
From my perspective, yes. IThey have asked the trustees to fund or take assets and fund a variety of things, whether health or beneficiary education programs, governance programs, things like that. The short answer is yes, I think that happens all the time. I think they folded that into some of the distribution provisions.

I if I haven’t seen this specifically, but if I were a good trustee, I’d want a note signed by the various beneficiaries that are participating in this saying that we’re doing this to provide an improvement in this or that. We’re doing it in a way meant to further family goals and sort of set out by the grant or somewhere. But I don’t know of any.

corporate trustees that are doing this other than maybe as an add-on service that is separate and apart from their trustee function, which I bet they probably take great pains to put up firewalls so that the decision-making on the fiduciary side is a little bit different from the service provision on some other side.

Paul Hood (22:31.176)
I think that’s probably right. Again, right now, if I was a Delaware trustee, it would be no opt-ins and by no, even if you wanted to opt in, never, never, never on a directed trust, which now most trusts are. You know, about almost 30 years ago,

Frazer Rice (22:53.12)
Sure.

Paul Hood (23:00.474)
I spoke to a national group of trustees of a bank that is no longer here. And I told them, if y’all make the mistake of going to 1-800-TRUSTEE and quit making the hard decisions, you’re going to go the way of the dodo bird. There about 400 of them in the room. And they looked at me like deer in the headlights.

And I was right about them because that’s essentially what they went to and then they went down. So, and this is a big national bank. it’s, is, this is, these are the times that tri fiduciary souls and, and,

Frazer Rice (23:49.749)
at fiduciary insurance providers too. I’m sure.

Paul Hood (23:53.678)
Well, that’s exactly right. And you had mentioned about could you, you know, could you.

get out of it, could you change it? Well, one obvious way is a non-judicial settlement agreement. We all get together and we force King John to sign the Magna Carta on Runnymede. We go from there, but I can see accountings going forward. When they ask you to sign off, there’s gonna be a wellbeing accounting.

And it’s going to include things like, okay, here’s the services we provided. Here’s the values, blah, blah. And that’s all the services we believe you need. And if you need something else, you need to let us know. I’d try to flip as much of it back on the beneficiaries as I could.

Frazer Rice (24:51.141)
and when you open up the idea of qualitative benchmarking to the trustee function, if I’m wandering into a trustee situation personally, I’d be going, no thanks. Hence the term qualitative. There’s no amount of money you can pay me to guess whether someone will sue me 15 years from now.

Paul Hood (25:04.438)
Right, right, right, because you can’t quantify your risk.

Paul Hood (25:18.892)
Well, you’re exactly right. And I think that’s where they ultimately are going. I don’t know, because I haven’t been able to investigate and Columbo the information out yet. Because I will go back and pardon me, one more question for you. What I want to know is why…

did they, what prompted them to think they had to act then with a quickly enacted law? And my suspicion is the big banks, they all have their upper end concierge service. I Wells Fargo’s Abbott Downing, know, Ascent, I think is US bank.

And those groups, Merrill has their own, those groups have PhDs in family psychology and wealth psychology and everything else. They’re providing those services now to their people. And I think the Delaware trustees want to make sure they don’t miss out on that train. But with that comes a lot of liability, as you said.

Frazer Rice (26:35.029)
Yeah, and also they had to find a way to pay for it. Those services aren’t cheap. Those people are expensive. And invariably, the trust tends to be a pot of money to compensate for that and maybe the only pot of money. And if it’s unclear whether that’s an allowable distribution, mean, that to me, I agree with you, that’s probably part of the reason they did it.

I think there’s a good reason they did it, which is ultimately providing another tool in the toolkit for the trustee to help with the long-term wellbeing of the beneficiaries. We’ve gone through a lot of different references before. The road to hell is paved with good intentions here. I think we’ll probably agree that there might be some better precision with the drafting here that could make this a better tool for everyone involved.

Paul Hood (27:29.326)
Well, I will tell you another area that and Jocelyn agreed with me on this. If you read the unit, the Delaware’s version of the old UPIA. because Umifa replaced it. Okay. If you look at their law, it’s unclear where to charge those well-being payments, whether they’re deductions or distributions .

If you look at the new Umifa, they charge 100 % to principal for those services. Jocelyn said under Delaware law right now (and this is something she agreed that they needed to change) those services are all 100 % chargeable to principal under current Delaware law. So that’s another area they need to change.

Frazer Rice (28:28.659)
Crazy stuff.

Paul Hood (28:28.81)
You did let me also go back to something that you mentioned about turning it off. Okay well obviously besides the NJSA that we talked about there’s also the possibility people say just decant it out. Well be careful before you decant because people are getting bad news.

in state fiduciary, I’ve seen 18 adverse decisions in the last three years in state fiduciary duty actions. And they’ve involved more than just the trustee. A lawyer in an Illinois case got zapped by his malpractice carrier in a decanting.

They said it was an intentional tort and excluded from coverage. Another lawyer got disciplined for an improper decanting. People are saying, this is easy. Just pour the bottle in, new trust. It’s not that easy.

Frazer Rice (29:24.391)
Yikes.

Frazer Rice (29:39.059)
Perhaps for the unwary. Paul, great stuff. Let’s pause there because we can probably go on for two more hours. How do people find you and your writings?

Paul Hood (29:48.318)
well, have a lot of webinars and articles at lineburgservices.com. My website, paulhoodservices.com has a lot of my latest articles, as well as some, real interesting checklist, one of the best client development tools that I’ve ever seen and I developed it and I bet it’s for free on my website is my buy sell options grid. And there’s a lot of other stuff there. My email is Paul at Paulhoodservices.com. I get questions from people mostly all over the country, but occasionally from foreign countries. And so, and I’m, you I always respond.

Frazer Rice (30:30.803)
Great stuff and go Tigers. Go G-E-A-U-X.

Further Information on the Delaware Well Being Trust Statute

Todd Flubacher Article

INDIVIDUAL TRUSTEESHIP

Keywords

trustees, well-being, Delaware trust code, beneficiary needs, fiduciary duties, trust management, directed trusts, trust responsibilities, estate planning, trust law

https://www.amazon.com/Wealth-Actually-Intelligent-Decision-Making-1-ebook/dp/B07FPQJJQT/

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