Beneficiary Well-Being Trust – Panacea Or Panoply of Perplexities

by Joel S. Luber

The Great Wealth Transfer. Over the next 10-15 years, estimates range from $84 to $90 trillion in wealth will be transferred from the Silent Generation (born from 1925 to 1945), Baby Boomers (1946 to 1964) and the older end of Generation X (1965 to 1979) to younger generations. The recipients of a large majority of this transfer of wealth will be millennials, also known as Generation Y (those born from 1981 to 1996). After that, Generation Z (1997-2012). That makes the range of ages for these recipients, today, 13 to 44  (Gen Y and Z),

Questions. There are two questions of significant concern associated with what has been labeled by the media at large as the “Great Wealth Transfer”.

• Whether the child is ready to handle a significant distribution.

• Even if a trust agreement does not provide for periodic, or any outright, distributions to a child, but rather creates perpetual trusts for future generations, whether that child or grandchild beneficiary understands and appreciates the concept of legacy wealth.

• The concomitant question is whether to disclose to the child or grandchild that he or she is a beneficiary of a legacy trust, and if so, (i) at what age; and (ii) who is the person that should make that disclosure.  

Beneficiary Well-Being Trust. The 2024 Delaware Trust Act added a new Section 3345 to Chapter 33 of Title 12 of the Delaware Code (“Section 3345”) , signed into law on August 29, 2024, titled “Beneficiary Well-Being Trust”.  This is the first of its kind in state trust law. No other state has enacted similar legislation. The essence of the statute is to augment the powers of a trustee to authorize the creation of “beneficiary well-being programs”, defined to include “seminars, courses, programs, workshops, counselors, personal coaches, short-term university programs, group or 1-on-1 meetings, counseling, family meetings, family retreats, family reunions, and custom programs”[1]  for the purpose of “[e]ducating beneficiaries about the beneficiaries’ family history, the family’s values, family governance, family dynamics, family mental health and wellbeing, and connection among family members”,[2] all at the expense of the trust.[3] 

While I recognize  that the members of our Council are primarily Pennsylvania-centric, I believe our having a working knowledge of this unique statute is relevant, because being involved in creating trusts in jurisdictions other than Pennsylvania, including Delaware, is a common practice for most of us, whether to take advantage of more favorable asset protection laws, decanting options, and/or state income tax laws. And now, perhaps, there is one more reason (maybe two) to consider Delaware as the jurisdiction in which to create a trust. This article will explore some of the provisions of this relatively new DE statute, and address some of the issues that will need to be taken into consideration before recommending a Beneficiary Well-Being Trust to clients.

Silent Trusts. Before diving into 12 Del. Code §3345, which obviously portends needing to disclose to trust beneficiaries the existence of a trust and the specifics of the trust,  I want to address, briefly,  the concomitant question first raised, that being whether to disclose to a child or grandchild (or any person) that he or she is a beneficiary of a trust. What if a client tells us not to disclose the existence of a trust to any of the beneficiaries, asking us to draft what is sometimes referred to as a “silent trust”.

State Law and Silent Trusts.

Delaware. One can write a silent trust under DE law. 12 Del. C. §3303(a). “Notwithstanding any other provision of this Code or other law, the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary any laws of general application to fiduciaries, trusts, and trust administration, including, but not limited to, any such laws pertaining to: (1) The rights and interests of beneficiaries, including, but not limited to, the right to be informed of the beneficiary’s interest for a period of time…” 

Pennsylvania. Regrettably, perhpas, one cannot write  a “silent trust” under PA law. There is no comparable provision to 12 Del. C. §3303  in the Pennsylvania Trust Act. To the contrary, there is a mandatory notice provision in 20 PA Code §7780.3; so mandatory, in fact, that even 20 PA Code §7705, which says that “the terms of a trust prevail over any contrary provisions of this chapter”, carves out an exception (among 14 exceptions) for the duty to inform under §7780.3. 

New Jersey. The NJ Trust Code [N.J. Stat. §3B:31-5(7)] has a similar provision as the PA Trust Act that does not allow the terms of the trust to override certain mandatory duties, one of which is the duty to inform. 

Nevada. But, for those assisting in drafting trusts governed by NV law, as I do (my preferred jurisdiction for first party asset protection trusts), §163.004.1 of the Nevada Trust Act states that: “Except as otherwise provided by law, the terms of a trust instrument may expand, restrict, eliminate or otherwise vary the rights and interests of beneficiaries in any manner that is not illegal or against public policy, including, without limitation: (a) The right to be informed of the beneficiary’s interest for a period of time.”

Other States.  Not surprisingly, those other states that have first party asset protection trust legislation on their books, like Delaware and Nevada [twenty-one in total, and counting, but not yet including Pennsylvania], also authorize the creation of silent trusts. These include Alaska; New Hampshire; South Dakota; Tennessee; Wyoming and Ohio.

Issues to Consider in Creating a Silent Trust.  Again, although not doable under PA law, issues to consider before advising clients to create a silent trust in any other jurisdiction include:

• the validity of prenuptial agreements and divorce judgments if existence of trust not disclosed;

• the need to reveal tax forms to beneficiary to fulfill trustees tax reporting obligations when distributions are made directly or indirectly for a beneficiary;

• income taxed at higher rates if kept inside trust and not distributed to avoid inadvertent disclosure;

• greater liability exposure to trustee and trust protectors if decisions are made that bind beneficiaries without their knowledge;

• extension of time period for claims against a trustee that otherwise would expire upon a statutorily mandated date certain after notice;

• lose flexibility in modifying or decanting a trust which otherwise requires beneficiary consent; and

• lastly, but perhaps most significantly, delays preparing the family's next generation members to manage the wealth that is coming their way…. which leads back to a Beneficiary Well-Being Trust.

Issues to Consider in Creating a Beneficiary Well-Being Trust.  Section 3345 is less than one page in length. But within this one page there are a myriad of practical, legal and tax consequences that come into play, including the expansive use of the term “family”; the compensation that can or should be paid to a trustee to implement the “programs”; the mandatory language potentially limiting trustees’ discretion; possible conflicts with HEMS standards; and, as described herein, the tension it creates if the trust is otherwise declared to be a “silent trust” (the two would appear to be completely incompatible).  

It is interesting, too, that in the same 2024 Delaware Trust Act that added Section 3345, there was added a new Paragraph 32 to  Section 3325, titled “Specific powers of trustee” that broadens trustee powers by authorizing, rather than mandating, financial education services, even absent express trust language. The language in both new provisions [§3325(32) and §3345]  is almost identical in terms of a trustee being authorized to provide financial education services to beneficiaries. The big difference between these two sections is described below.

Opt-In. A beneficiary well-being trust is an “opt-in” proposition.  Section 3345 applies only if the governing instrument makes an express reference to this section and states that this section, or any part of it, shall apply.[4] But once selected, Section 3345 mandates that these programs be delivered, permitting “the trustee itself [to] provide beneficiary well-being programs” and compensate itself for doing so—on top of the “full fiduciary compensation to which the trustee is otherwise entitled.”

Trustee Compensation. Notably, the trustee may set its own compensation for providing well-being programs and may do so “without prior notice or disclosure to any beneficiary of the trust.” [5] The trustee’s ability to enhance its fee by creating a broad range of programming without notice to beneficiaries raises a fundamental question: Are these reforms truly beneficiary-centric, or are they an attempt to create new business lines for trustees and affiliated businesses? Query, further, whether this provision conflicts with Title 12, Chapter 35, Subchapter V, Compensation of Trustee, which requires trustee compensation to be reasonable.[6] Section 3345 states that a trustee is entitled to its “full fiduciary compensation” in addition to any fees charged for beneficiary well-being programs—raising the question of whether these additional fees fall within the scope of the term “compensation” in Subchapter V.

Scope of the Trust. Can the purpose and scope of the well-being trust be restricted in the governing instrument? At first blush, it might seem that opting in to Section 3345 is an all or nothing endeavor. For example, the statute specifically provides that “the governing instrument may provide for additional powers, duties, rights, and interests that may expand the purpose or scope of a beneficiary well-being program.” [emphasis added][7]  However, Section 3303 infers the powers can be restricted[8]: Notwithstanding any other provision of the Delaware Trust Code (yes, that includes Section 3345), “the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary any laws of general application to fiduciaries, trusts, and trust administration.” [emphasis added] Therefore, if you like the idea of beneficiary well-being trust, you can opt in to Section 3345 and then restrict its scope and application, albeit with very careful and precise drafting.

Family. Section 3345 mandates that trustees fund beneficiary well-being programs, which may include activities such as “family reunions” and “family retreats.” To be noted, the term “family” is not defined in this Section, or anywhere in Title 12. In the absence of statutory or trust-defined guidance, trustees are left to interpret who qualifies as “family”—a category that may extend well beyond the current permissible distributees of trust income and/or principal.

HEMS Standard. What happens when an interested trustee has discretionary authority over such expenditures, and the discretion to make distributions is limited by a HEMS [health, education, maintenance and support] standard?  How do you ensure those distributions remain within the confines of the HEMS standard? Section 3314(c) offers a partial safeguard by limiting the discretionary distribution powers of interested trustees to those consistent with the HEMS standard. In theory, this restriction helps prevent estate tax inclusion and maintains creditor protection. In practice, however, its effectiveness may be limited.

Consider a scenario in which a beneficiary-trustee approves monthly, all-expenses-paid wellness retreats to Switzerland —complete with skiing lessons and one-on-one coaching from a “financial wellness advisor” who also happens to be a friend. While nominally framed as a well-being program, such expenditures stretch the bounds of reasonableness and likely exceed the limits of HEMS. In those cases, Section 3314(c) may provide little practical protection. Drafting to restrict discretionary powers and better define program boundaries—especially when an interested trustee is involved—remains critical.

Accounting and Tax. The statutory definition of “beneficiary well-being programs” is both expansive and imprecise—perhaps intentionally, to accommodate a wide range of planning goals. The tax implications, however, are less a product of flexibility and more a creation of uncertainty. Under Delaware’s UPIA, Chapter 61 of Title 12, trustees must determine whether to allocate expenses related to well-being programs to income or principal. Section 61-501(3) governs disbursements from income, including “ordinary expenses incurred in connection with the administration” of the trust. Section 3345(d)(1) categorizes well-being program payments as “an expense of administration of the trust to the extent permitted by law.” In effect, trustees are empowered to allocate expenses related to well-being programs to income —but that discretion is subject to the constraints of both Delaware state law and federal tax law.

Assuming payments to finance beneficiary well-being programs qualify as administrative expenses under Section 61-501, the next question is whether the expense is fully deductible—or subject to the 2% floor under IRC Sec. 67. If the beneficiary well-being program’s expenses arise uniquely in the context of trust or estate administration, then it may be fully deductible. Trustees and income tax return preparers will need to carefully assess whether the costs of family retreats or financial literacy programs are truly unique to fiduciary administration—or whether they resemble expenses an individual might reasonably incur outside of a trust context.

Conclusion. The Beneficiary Well-Being Trust legislation appears to have been motivated  by  an effort to shift the trustee’s traditional role beyond financial stewardship and into the realm of beneficiary development—psychological, emotional, and financial. But, hasn’t that always been a part of the trustee’s duties? Trusts have long been structured for the benefit of beneficiaries, with trustees tasked not only with preserving wealth but also with making thoughtful distributions that support a beneficiary’s broader well-being. The statute suggests something novel is being introduced.

But I would proffer that many carefully drafted trusts, even in Pennsylvania, already incorporate educational and family-building provisions consistent with the grantor’s intent. [I know I have included in the trust agreements I have prepared for over 30 years a provision that authorizes trustees to do exactly that. See, sample language in this footnote.[9]]. Thus, while this DE statute may be well-intentioned, if one chooses to recommend to clients to opt-in, it is important to understand that it raises significant interpretive, tax, and fiduciary issues that must be carefully navigated. And, as with all newly enacted legislation, with little or no interpretative guidance coming  from regulations or case law, practitioners will be required to tread cautiously. 

Joel S. Luber, Senior Counsel and Chair of Reger Rizzo & Darnall’s Wills, Trusts & Estates Group, focuses on sophisticated estate planning, asset protection, estate administration, and related tax matters. He approaches estate planning as a collaborative process with clients and their trusted advisors, and with his Wharton and NYU Law background, he is uniquely equipped to lead across disciplines and make complex tax law understandable and practical.

[1] 12 Del. Code § 3345(b)

[2] 12 Del. Code § 3345(b)(1) and (2)

[3] 12 Del. Code § 3345(d)

[4] 12 Del. Code § 3345(a)

[5] 12 Del. Code § 3345(d)(3)

[6] 12 Del. Code §3561(b)

[7] 12 De. Code §3345(e)

[8] 12 Del. Code

[9] Agents.  To employ brokers, realtors, accountants, attorneys, custodians, appraisers, investment counselors, private investigators, and other agents, employees, and advisers, including any Trustee, any employee, partner, or officer of any Trustee, or any other person; to retain and compensate qualified professionals to provide seminars, programs, workshops, counselors and personal coaches and facilitate and host meetings that provide financial planning, education about wealth management, budgeting and estate planning and awareness of philanthropy for the beneficiaries of any trust; regardless of whether a bank is acting as a Trustee, so long as any individual is acting as a Trustee, the individual Trustee or Trustees are authorized to employ an investment adviser in addition to that bank; to pay from the trust all disbursements, costs, expenses, fees, and other charges so incurred, without diminution of any Trustee’s commissions; to act or to refrain from acting upon advice received from any of those sources, with no liability for any act done or omission made in good faith reliance upon that advice.