(Wealth Advisors Trust) As the Greatest Generation continues to transfer wealth to their heirs via trusts, we’ve seen the escalation of family conflicts that could become opportunities for advisors to resolve—and gain new assets as a result.
Here’s what’s happening. When wealthy individuals establish trusts, they often appoint friends or family members to serve as trustees for another family member to oversee investment management, distributions and trust administration after the generators of the wealth pass on.
But these friends or siblings who accept this role often don’t realize that they have a fiduciary responsibility to always act in the best interests of beneficiaries.
It’s complicated.
When they don’t understand these duties, they often fail as fiduciaries. How? By favoring certain family members, benefiting from quid-pro-quo arrangements, not overseeing the investments properly or paying themselves excessive fees from trust assets.
Beneficiaries often take their relatives or friends to court when these lapses occur.
Think this is a rare occurrence? It isn’t. In fact, I can provide a list of more than 40 legal cases where beneficiaries sued family trustees and/or financial advisors for fiduciary lapses and excessive family trustee fees.
Large and small trusts are included in these examples. And, in every single case, beneficiaries claimed that a family trustee had violated their fiduciary responsibility.
And beneficiaries aren’t just suing trustees. If you manage assets for family trusts, you could also be brought to a lawsuit for failing to keep these trustees’ behavior in check.
Even if you’re likely to be held blameless, the legal costs and reputational damage you’d suffer could put your entire practice at risk.
So, what can you do to prevent these lawsuits from occurring?
Step 1: Make Sure Trustees Understand Their Fiduciary Responsibilities
First off, it’s critical to educate anyone who wants to become a family trustee of their fiduciary responsibilities.
1. Trustees must act in the best interests of all beneficiaries. This duty includes managing trust assets prudently (or choosing an investment adviser to prudently manage trust assets), distributing assets in accordance with trust provisions, avoiding conflicts of interest, keep accurate records for all decisions and communicating effectively with beneficiaries.
2. Trustee fees must be reasonable. There are well-known industry standards that outline appropriate fee ranges for different activities depending on the size and complexity of the trust. One “unreasonable” example is when family trustees outsource investment decisions but still charge the same fees as a traditional trust company that manages investments in-house.
3. Trustees must be committed to full disclosure. They should clearly and transparently communicate to beneficiaries the specific services they provide to prove their fees are necessary and appropriate.
4. Trustees must respond to beneficiaries’ concerns. They need to be prepared to respond when beneficiaries challenge their fees or how they handle their fiduciary duties. And they must keep accurate records, (aka document, document, document) just as corporate trustees must do.
5. Trustees should be willing to seek professional guidance. Trust administration can be complex and challenging, and trustees should get the advice and guidance they need from attorneys, accountants, trust administrators and financial advisors to ensure that they are fulfilling their fiduciary duties.
Beneficiaries should understand these responsibilities as well.
Step 2: Empower All Stakeholders with the Knowledge They Need to Keep Trustees Accountable
The more both trustees and beneficiaries understand the details of their family trust, the less likely that lawsuits will occur. As their financial advisor, you should take the initiative to encourage them to educate themselves on the following issues.
1. Go over the provisions of the trust document with both trustees and beneficiaries. In addition to specifying when and how distributions should be made, the trust document should also outline how trustees are compensated. Meet with trustees and beneficiaries (and their attorney) to review the document to ensure that everyone knows what the trustee’s fees should be and what they’re doing to earn them.
2. Compare fees to industry standards. Recommend that beneficiaries consult with their accountants or lawyers to obtain information about standard trust administration fees to determine if the current compensation for family trustees is reasonable.
3. Provide documentation of fees. Beneficiaries can request a detailed accounting of the trustee’s fees and expenses to ensure that these costs are reasonable, authorized, and necessary.
4. Spell out actions that could constitute fiduciary breaches. Both trustees and beneficiaries should be aware of actions such as self-dealing, favoritism or discretionary distributions that constitute violation of their state’s trust laws.
5. Seek legal advice. If beneficiaries have concerns about trustees but don’t feel that they have the knowledge to challenge them, advise them to seek legal advice from a trust or estate planning attorney. This professional can review the trust document, fee accounting reports and other actions taken by the trustee to determine if the beneficiaries’ concerns are justified and what legal options may be available.
Of course, one way these potential conflicts and lawsuits can be avoided altogether is to suggest that all stakeholders agree to appoint an experienced corporate trustee to administer the trust either as sole or co-trustee.
And you can help them find the right company to take on either role.
As a sole trustee, a corporate trustee can ensure that every aspect of trust administration, from the investment management you provide to the distribution requests the trustee reviews and fulfills, is carried out in a prudent, transparent, and cost-efficient manner.
And as a co-trustee, an advisor-focused trust company like Wealth Advisors Trust Company can ensure that family co-trustees are always acting in the best interests of all beneficiaries and are paid appropriately for the services they provide.
If you’re working with clients or prospects who are beneficiaries of existing trusts threatened by intra-family conflicts, consider these situations as opportunities to work with them and their attorneys to serve as family mediators.
You may end up convincing everyone to add a corporate trustee (with you serving as investment manager). And, more importantly, you’ll defuse the risk of expensive, time-consuming litigation that could result in irreparable family breaches.
For more information and coaching that can help you turn family trust conflicts into client acquisition and deepening opportunities, click here to set up a time to speak to a Wealth Advisors Trust Company experienced family trust management team member.
Christopher Holtby
Trust Educator & Co-Founder
Telephone: (605) 776-7012
Wealth Advisors Trust Company
