Navigating Family Dynamics: Challenges in contentious trust matters

25 Mar 2024

In the vast landscape of client service, trustees often find themselves navigating not only legal complexities and financial intricacies but also the difficulties of family relationships.

Family dynamics can pose significant challenges, often becoming the epicentre of contentious issues that trustees must address. From conflicting interests to generational shifts, the nuances of family dynamics can complicate decision-making, heighten emotional tensions, and test the resilience of wealth frameworks.

Some of the key risks for contention surrounding family wealth are marriages, divorces, and blended families (where two families are joined by marriage resulting in “step” and “half” relationships). It is estimated that one in three families in the UK are blended families, with Office of National Statistics results revealing over 32% of marriages include at least one partner who is remarrying.

The divergence of one household and the establishment of a new, blended family poses unique challenges for high-net-worth (HNW) families and their trustees.

The complexity of each scenario is weighted heavily on both the drafting of the Trust instruments, but also the dynamics between each family member and whether separations are acrimonious.

While divorce is, most likely, not at the forefront of mind for couples about to marry, it is prudent to discuss the possibility of a separation, particularly where substantial family wealth is a consideration for one or both parties. This applies to the Settlor and the potential addition of their new spouse to the beneficiary class, but also the next generation of beneficiaries marrying.

It is not only spouses who can safeguard family assets in the event of divorce or separation. For example, the settlor of a trust may wish to include or exclude their children’s partners from benefitting from trust assets and can be particularly useful when the Trust Deed has a wide-reaching beneficiary class.

Another consideration for trustees dealing with contentious matters is the phenomenon of increasing divorce rates in older couples – dubbed the “Grey Divorce”. Couples who have been married for decades will, often, have more complex financial arrangements to consider including pensions and jointly owned assets. It also may be the case that wealth has been generated through the course of the marriage.

The widely publicised divorce settlement between Amazon’s multi-billionaire founder, Jeff Bezos, and MacKenzie Scott, is the “largest in history”, with Ms Scott being awarded a 4% stake in Amazon, with an estimated value of close to £30bn. The case is a stark reminder of how a couple’s financial situation can change dramatically through the course of a marriage, as Bezos founded Amazon a year after the couple wed.

HNW families will experience the same highs and lows as any family, however substantial wealth can pose additional complications.

It is important that trustees build relationships with their clients, including all beneficiaries where appropriate, to be able to engage in open and honest discussions to ensure that the wealth structures remain fit for purpose, as over time, both families and their needs can change drastically.

Conversations about potential issues including separation, divorce and death are ones which trustees should have with their clients to ensure wishes are clearly understood. Trustees will often engage in “mapping” conversations to encourage clients to consider “what if” scenarios to better prepare for the future.

Relationships between trustees and a family are usually long-lasting and will see the transfer of wealth to the next generations of the family, as well as the transfer of trust administration to the next generation of professionals.

A thorough understanding of the dynamics within a client family can help a trustee to spot potential red flags. This can include asking the right questions when being asked to do things that fall outside the ordinary running of the trust or identifying conflicting views within the family as to the growth, diversification, and distribution of wealth.

In my experience of dealing with contentious trust matters, the transfer of wealth between different generations of the family poses increasingly high risks for disputes. The transfer of wealth to children with significantly different circumstances and views can pose considerable challenges.

Take for example a case where a settlor has established a trust to benefit their two children. One child plays an active role in the family business through their working life, directly contributing to the growth of the family wealth before retiring. The other child was not involved in the family business and is dependent on the assets of the trust fund, with no wealth held outside the structure.

It is likely that the child who contributed to the family business may feel that they should benefit more from the trust assets than their sibling. Meanwhile, the other sibling may feel entitled to a “fair share” of the family wealth.

What is “fair” is subjective and trustees must balance several factors including the wishes of the settlor, the reliance of each beneficiary on the trust assets and the protection and preservation of wealth for future beneficiaries. Trustees must continually evaluate whether each beneficiary is being treated fairly, while being mindful that “fair” does not necessarily mean “equal”.

Notwithstanding the efforts of the trustee, relationships between family members can become so fraught when disputes arise that it may be necessary to facilitate connections between clients and intermediaries including lawyers, mediators, or counsellors. It is paramount that trustees have a strong network of specialist client service providers to call upon when conflicts arise.

Trustees are custodians not only of wealth, but of legacies, and should address conflict with resilience, empathy, and a dedication to acting in the best interests of all beneficiaries. By fostering constructive dialogues and embracing the principles of fairness and impartiality, trustees can support clients through all manner of contentious matters.

This article was first published in ThoughtLeaders4 Private Client Magazine Issue 14.