The role and responsibility of the trustee seem obvious at first glance — to manage the wealth left in trust for the good of the beneficiaries. Much has been written about trustee duties. Detailed and complicated state statutes govern trustee conduct. The courts have had their say and will likely be called upon even more in the future. Yet these established parameters tell only part of the story. The reality is that the relationship between trustees and beneficiaries is often tense and challenging.

The scope of duties of the trustee depends largely upon the type of trust, its purpose, beneficiaries, duration and a host of other objective and practical criteria. This article, however, will focus on the most common form of trusts for high-net-worth families: those involving the management and distribution of wealth for children, grandchildren and other family members.

THE TRUSTEE

Some trustees are corporate fiduciaries at long-established institutions. Some are private fiduciaries, most of whom have arrived on the scene in this capacity within the last 20 years. Together, these groups represent the professional trustees and fiduciaries. The third, and likely the largest, segment are lay trustees — the settlor's family members, advisors and friends. They are not in the business of providing trust services, but do so out of respect for the settlor or a sense of duty.

There are no tests to become a fiduciary, no educational requirements imposed. Some states may require licensing or bonding if the individual

seeks to present himself as a professional fiduciary. Others have little or no specific criteria or conditions. This lack of reporting results in few statistics or percentages, but anecdotal evidence helps to paint a picture of the trustee landscape:

A majority of professional trustees demonstrate strength in the quantitative skills: financial matters, accounting and tax. A minority are picked because of their qualitative skills: relationship-building, communication and values similar to the settlor. Both lay and institutional trustees tend to be chosen because settlors view them as experienced with financial concepts, although many such settlors don't realize the extent of knowledge and specialization required. Far too rarely is selection based on a recognition of the full scope of the task, so that the individual possesses both the quantitative and qualitative skills needed to fulfill the diverse roles that this responsibility demands. These roles are:

  • Fiduciary — The trustee is bound to manage assets for today, grow assets appropriately for the future, determine distributions, allocate principal and income, prepare and file tax returns, keep records, and interact with a team of professional advisors.

  • Surrogate Parent — The trustee stands in the place of the settlor, and must make tough decisions, such as choosing between distributing or accumulating income, allocating and distributing assets among competing factions, and finishing the financial parenting that may have been cut off prematurely by the death or disability of the settlor.

  • Mentor — The trustee may be called upon to counsel a troubled or confused beneficiary, teach financial and life skills to those who could become dependent upon trust resources, provide career guidance, and communicate effectively with individuals who have very different learning styles and capabilities.

Recommending or serving as a trustee is a difficult and momentous responsibility. If the settlor or his advisor doesn't know what the trustee is supposed to do, then the person picked is unlikely to possess the range of skills or experience required to do the job right. Identifying the full range of characteristics needed, and preparing the designee to fulfill them, should not be done after the document is signed and the assets contributed.

FIDUCIARY

The most frequently discussed — and litigated — area of trustee duties is that of the fiduciary, sometimes referred to as the keeper of the coin. Professional trustees and administrators are trained in probate codes and a host of related statutes, regulations, decisions and policies. Many lay trustees have not been groomed in these requirements. They often have been given little preparation before, or even after, accepting the responsibility, and may not fully comprehend the quantitative issues.

The typical response by a settlor or advisor who is inexperienced in managing substantial wealth is to hire a trustee who purports to do all of these things. The dilemma, of course, is how to know that the person or institution hired is doing the job right. An inexperienced outsider may have difficulty judging a trustee's actions in the context of his industry, to gauge whether he is performing competitively in comparison with his peers and working within the range of best practices. The basis for a particular decision or recommendation may be unclear, such as whether his choice of consultants is prejudiced by payback for referring a case.

Questions to consider:

  • Will the fiduciary see his responsibility as perpetuating the estate or building its real value?

  • Will he be bound to diversify, or will he retain the legacy assets left by the settlor?

  • Is the trustee biased toward the services of a one-stop shop, in which the institution's range of financial products serves all the needs of the trust and may constrain his choice of advisors? Or will he seek ones who provide complementary, but independent, investment management?

  • Will the selection of consultants be based on special fee-sharing arrangements with the trustee, or on best-in-class standards?

The seriousness of these questions cannot be underestimated. Last year, upon turning 18, Liesel Pritzker, the granddaughter of the Hyatt hotel chain founder, brought suit against her father for $1 billion, alleging fiduciary mismanagement.1 An heir of the diamond magnate Harry Winston's estate recently brought suit for $1.3 billion against Deutsche Bank for breach of duty in connection with its management of the family business interest.2 And these are only the most recent, most spectacular and public of the grievances.

A common complaint is the trustee's failure to dispose of the legacy asset left by the settlor, with unfortunate economic consequences. This failure to diversify is caused sometimes by the emotional attachment of the beneficiaries and sometimes by the misperception or self-interest of a trustee. In a significant percentage of trust litigation, the alleged breach of fiduciary duty may have been caused by the trustee's financial inexperience or lack of familiarity with fiduciary trust law, by a false assumption that these duties could be delegated away, or even a misunderstanding by beneficiaries of a trustee's duty to distinguish among competing beneficiaries.

SURROGATE PARENT

Not well understood by many professional trustees, and even a fair number of lay trustees, is the settlor's unspoken hope, or even expectation, that the trustee will continue the financial parenting that the settlor would have done had he survived. While this role may seem most likely in relation to beneficiaries who are minors or young adults, the need for such guidance often continues into later years — especially if the resources available are significantly greater than the beneficiary may have experienced previously.

Money remains the last taboo, and it is not a common topic of conversation in most high-net-worth families. Children raised in financially challenged homes have a better instinctive understanding of money management because resources are limited, often forcing them to work for spending money. They hear frequent discussions of what options will have to be sacrificed for a major expenditure.

In wealthy families, however, luxuries often simply appear without mention of budgeting or financial discipline. Heirs can grow up with an oversized case of “entitle-itis” (if they want something, they feel entitled to it just because of their fortunate birthright). It should not be surprising, then, if beneficiaries have little skill in money management. Without the guidance of the trustee, such beneficiaries likely will squander assets, leading to pressure on the trustee for increased distribution. If extravagant spending persists unchecked, the final result may be the proverbial “shirtsleeves to shirtsleeves in three generations.”

It may not be fair to expect a trustee, especially one who has never met the settlor, to understand the settlor's real intent. The answer rests in the mind of the settlor, and should be reflected in the mission statement and guidance contained in the instrument. Managing the expectations of the beneficiaries is much more difficult when ignored by the settler and left to the trustee.

In one recent case that we handled, the trustee of an educational trust for grandchildren was sued by one of the parents of a grandchild-beneficiary to force the trustee to provide for him due to an “emergency,” a permitted exception to the distribution goals of the trust. The emergency was a divorce proceeding and a large monetary settlement due to the ex-spouse. While easily arguable that this was not the type of emergency contemplated by the settlor, in the absence of any clear guidance in the trust agreement, the trustee opted to avoid litigation and paid off the demanding parent.

Questions to consider:

  • Does the settlor want the trustee to treat all the kids equally?

  • Does “equal” really mean equal, or does it mean equitable?

  • Should the trustee provide more for the beneficiary who has failed in business, to compensate for his greater need, or favor the beneficiary who has achieved personal financial success, as a reward for hard work and independence?

  • Will discretionary decisions be based on financial considerations or political ones?

  • What did the settlor do during life? What would the settlor do if he was still alive?

In healthy families, parents raise their children to become self-sufficient, making it clear that growing up usually means moving out. These parents encourage effort and initiative, and frown on indolence and indifference. Yet, the wealth creators from these same families often leave their wealth without any of these values incorporated into their trust documents. Perhaps the failure lies in the design and drafting, but this doesn't relieve the trustee of the inherent duties and responsibilities.

Few trusts contain statements of intent or family missions. Few settlors have met with their designated institutional trustees, and fewer still have had any extensive discussions with either the institutional or private trustees on these issues. In many cases, settlors have not even thought through all the choices available in drafting a trust and selecting a trustee, nor the impact of future decisions on the personal and emotional well-being of the beneficiaries.

These issues should be confronted during the lifetime of the settlor and before or at the time the trust is established. The resolved values and goals should be conveyed to the beneficiaries and trustees, and reflected in specific written guidance, sometimes with practical examples. This is not ruling from the grave, as might be argued. It is clarifying intent, and preparing those most affected before a crisis occurs.

Discussing expectations and proposed distribution criteria at a family meeting is one of the most successful ways to anticipate and avoid problems. Often beneficiaries provide even greater clarity, suggesting potential scenarios that the settlor had never considered.

MENTOR

Even more rarely appreciated or applied is the role of the trustee as mentor: teacher, counselor, motivator, facilitator and sometimes disciplinarian. While not every trustee will possess all the personal skills and experience required to carry out these tasks, he should identify critical life skills that would enhance the personal growth and well-being of the beneficiary, and facilitate opportunities for learning and training by outsourcing to independent professionals.

It will take more than good intentions to do this job well. Each beneficiary may have a different learning style, level of financial acumen and degree of interest in achieving personal and financial competency. It may require bridging a language gap by translating monetary policy and finance into more user-friendly vocabulary.

The mentor has the opportunity, and perhaps the obligation, to prepare the beneficiary for the responsibilities of wealth. Most trusts eventually come to an end, and after years of dependence upon a trustee, some beneficiaries are thrust out of this supervision ill-prepared to make competent decisions for themselves — no matter what age they are when that moment arrives. Advisors need to think about that time frame and design the trust instrument to anticipate its demise, making clear to trustees their obligations in this transition.

Beyond the world of dollars and cents lies the world of insight and common sense. Some beneficiaries may be vulnerable to manipulators and connivers, and get-rich-quick-and-go-broke-quicker schemes. In the absence of parental guidance, the opportunity for the trustee to significantly affect the long-term personal well-being of the beneficiary is too important to ignore.

Questions to consider:

  • Will today's beneficiary be ready tomorrow to manage the wealth, when the trust terminates and the assets are distributed?

  • Will the beneficiary have any real-life experience investing assets, rather than just spending income?

  • Has the trust been designed to encourage self-sufficiency and hard work, or dependency and indifference?

  • Did the settlor expect, or would he have wanted, the trustee to use some of the trust resources to teach the beneficiary how to become financially competent?

  • Is genuine security a function of wealth or self-sufficiency?

Long after the investment returns are calculated and the wealth distributed, the real success of the trust and trustee will be measured in the growth and development of the beneficiary, and the positive contribution that he makes to the community.

A NEW PARADIGM

The relationship between trustee and beneficiary does not begin with a free choice on the part of either party. It is an arranged marriage. The trustee may never have met the beneficiary or even had a personal acquaintance with the settlor, but suddenly these two people find themselves arbitrarily joined in a long-term very personal relationship.

The trustee's responsibilities may demand new skills and exceed his expectations upon accepting the appointment. The recent flurry of fiduciary litigation demonstrates that a limited view of the trustee's role as merely keeper of the coin is incomplete. The most successful relationship occurs when there is a balance between quantitative skills and qualitative focus; when economics are integrated with education; and when the trustee sees himself as a supportive partner, not as a stern and protective custodian. Rather than a top-down approach in which the trustee lords over the beneficiary, he should encourage active collaboration, open communication, and mutual respect.

Best practice is actually good business. Those trustees who develop strong working relationships with their beneficiaries will attract new business, positively differentiate themselves in the marketplace, and minimize the risk of being sued or fired.

A new attitude is only the beginning, however. Trustees will need additional and more diverse training for these expanded roles. Beneficiaries will need their own coaching in order to understand their responsibilities in the relationship and better appreciate what to expect from their trustees. The process begins with proper preparation of the settlor, more thoughtful design and drafting by counsel, and careful selection and training of trustees. The consequences of this new dynamic will be better professional services, and stronger, healthier, more functional individuals and families.

Endnotes

  1. Cook County Circuit Court, Chancery Div., Case 02CH21426.
  2. Susan Hansen, “Harry Winston Estate Fight,” Trusts & Estates, March 2003, at p. 10.