Trusts and the evolving expectations of next generation beneficiaries

“Younger beneficiaries are increasingly concerned about the impact of their investments on sustainability issues,” says Antonio Risorto, Head of Wealth Planning for Europe at Deutsche Bank’s Private Bank. “And we’re increasingly helping trustees to factor this into their thinking, alongside fiduciary duties, settlor intent and the interests of future generations.”

Rooted in English common-law traditions, trusts have long been used in estate and succession planning in jurisdictions where such structures are recognised. Yet many existing trusts pre-date the emergence of Environmental, Social and Governance (ESG) policies, regulations and impact-investing frameworks.

While charitable provisions may form part of trust arrangements, trustees’ duties will depend on the terms of the trust and the applicable law, Risorto says. Depending on a client’s location and circumstances, these may include responsibilities relating to the prudent management of trust assets and the interests of current and future beneficiaries.

Demands from beneficiaries to consider sustainability can sit uneasily alongside these obligations, particularly where trustees believe such approaches may constrain the investment universe or affect risk-adjusted returns.

In practice, a bank can help families bring these perspectives into a structured conversation, working alongside trustees and clients’ legal and tax advisers to clarify objectives, explore the available options and consider how investment priorities may fit within the wider wealth plan.

The question is whether evolving priorities can be accommodated within existing trust structures. Many trusts are discretionary, giving significant decision-making authority to trustees. However, that discretion must be exercised in accordance with the trust deed and the interests of both current and future beneficiaries, which can create tension where younger beneficiaries favour approaches that consider sustainability.

As Risorto puts it: “Trustees have considerable discretion, but must balance the settlor’s intentions, the priorities of beneficiaries and their obligations under the trust deed.” 

Engaging beneficiaries with divergent views

In Risorto’s experience, trustees are increasingly seeking the views of beneficiaries and putting processes in place to manage differing expectations. The challenge is often compounded by trusts that span multiple generations and jurisdictions, with beneficiaries holding different perspectives on philanthropy, sustainability and investment strategy.

Balancing those competing priorities across a single pot of family wealth becomes even more complex when future generations must also be considered.

“How do you balance the interests of the full range of beneficiaries?” asks Risorto. “Trustees cannot consider only those who are here today or the preferences of those who are most vocal.”

“Do you prioritise income generation, capital preservation or liquidity? Will investment lenses prove too restrictive, thereby impacting returns and creating concentration risk?”

For Risorto, a wealth manager can support this process by helping families articulate their differing priorities and establish a common framework for discussion. This may include facilitating conversations across generations, helping clients define their long-term objectives and coordinating with trustees and external advisers as the family considers the implications for its wider wealth strategy.

Adapting through governance and policy changes

Some trusts can accommodate evolving priorities through governance and policy changes without wholesale restructuring. If the settlor is still alive, a letter of wishes may be revised, for example. “It can be rewritten to factor in family values, sustainability and stewardship,” states Risorto. “It’s not a legally binding document, but it helps guide the trustees.”

Depending on the jurisdiction and trust structure, additional flexibility may exist through investment powers reserved to parties other than the trustees, such as the settlor or a family committee. 

Another option is to adapt the trust’s investment policy, he says. Trustees can work with external asset managers to draft investment policy statements addressing sustainability, alongside core considerations such as target returns, risk tolerance and liquidity needs. Industries or asset classes that a family decides do not align with their values can be excluded. 

“Such policy statements provide a platform for closer engagement with beneficiaries and an opportunity to foster understanding about what is and isn’t feasible,” says Risorto.

Decanting assets into new structures

Where more significant change is required, trustees may be able to appoint assets into a new trust or sub-trust with a different mandate or governance framework, states Risorto. 

“Amending a trust deed is possible but can be complex,” he says. “Sometimes, depending on the terms of the trust and the applicable law, one option may be to appoint or ‘decant’ assets into a new structure that offers greater flexibility. Whether that is possible, and the requirements involved, will depend on the particular circumstances.”

Depending on the terms of the trust, applicable jurisdictional laws and other conditions, assets may be transferred to a new trust, including a charitable trust, or to sub-trusts designed to accommodate differing beneficiary priorities. Where available and appropriate, such structures could provide scope to accommodate sustainability preferences or philanthropic objectives – but the outcomes are not guaranteed. Families pursuing philanthropic goals may also consider structures such as donor-advised funds (DAFs), subject to the relevant legal and tax considerations.

Where structural changes are being explored, a bank’s role may be to help clients assess how the available approaches relate to their broader wealth, investment and succession objectives, while coordinating with the trustees and the family’s legal and tax advisers, according to Risorto. However, the appropriate route will depend on the trust terms, applicable law and the family’s circumstances.

Some families overseeing significant pools of wealth establish a private trust company to oversee trust governance and increase their involvement in investment decision-making. 

Navigating evolving expectations

Discussions about sustainability could often form part of broader family conversations relating to long-term objectives and succession planning, Risorto says. In his experience, younger generations may want their wealth to reflect social or environmental priorities, presenting trustees with questions that traditional trust structures might not have been designed to address when they were established.

The challenge is determining the extent to which changing beneficiary expectations can be accommodated through flexibility in existing structures and where broader structural changes may be required.

By bringing together wealth planning and investment perspectives, and working alongside trustees and clients’ external advisers, a trusted banking partner could help families explore these questions within the context of their long-term objectives, governance arrangements and succession plans.

Trusts and evolving beneficiary expectations: FAQs on how banks can support families