What follows 20 years of unprecedented wealth creation? Many more years of unprecedented wealth transfer.
A massive transfer of wealth has begun.
Market intelligence firm Wealth-X forecasts that $16 trillion of wealth is expected to change hands over the next 30 years. The upcoming transfer includes more than $2.1 trillion by 460 billionaires, according to the UBS/PwC Billionaires Report 2016.
Trustees, personal representatives and other individuals called on to oversee this transfer face more complicated challenges when it comes to their fiduciary responsibility. Trust structures are changing, trust assets increasingly include alternative asset classes, and much of this wealth is self made. The result: a host of issues including succession planning. These factors create a perfect storm of risk—and a powerful argument for increased legal protection. “Litigation that targets estate-related trusts and trustees is on the rise,” according to a June 2017 article in Barron’s magazine. For trustees today, a misstep could literally cost millions.
A Changing Environment
As family assets grow in size and complexity, states are responding with new laws that provide greater asset protection and tax-advantageous trust environments. Modern trust laws are evolving to give families privacy and fiduciaries greater discretion.
The definition and uses of “trusts” have expanded. There are now directed trusts, qualified trusts, charitable lead trusts—the list goes on as structures evolve to accommodate goals such as starting a charity and launching a startup. Laws differ from state to state, and many are just beginning to be tested in court.
Concurrently, assets within trusts are diversifying beyond real estate, stocks and bonds, encompassing assets such as commodities, mineral deposits, collectibles, art and family businesses. For example, a trust portfolio can now contain an operating business. Advisors are more likely to encounter trusts with an operating business because 68 percent of wealth amassed today contains some element of self-made wealth, according to Wealth-X.
If the asset is a family business, is there a succession plan? Does anyone in executive leadership hold fiduciary responsibilities in the trust? If so, does this individual’s mission as a trustee (protecting an inheritance for beneficiaries) conflict with the obligation to maximize shareholder returns? These bigger, more complex portfolios are bringing more players to the trust management team, such as distribution trustees, business trustees, trust protectors, private trust companies, family offices, family-dynamics specialists, registered investment advisors, and property and business managers. Grantors and beneficiaries are less willing to turn over all the responsibilities to a single, corporate trustee. They want to recruit their most trusted advisors such as their attorneys, accountants and investment advisors onto the team.
Identifying Risk: Knowledge Is Power and Protection
Those with fiduciary responsibility, explicitly defined or implicitly construed, need to truly understand what they’ve signed up for. This includes appreciating the responsibilities you’re required by law to fulfill, as well as the consequences of not upholding their duties.
Enlist someone experienced to help you identify vulnerabilities in your client’s trust or estate and your fiduciary role. They’ll know where the claims may come from, what to look for in terms of risk, and the questions you would not know to ask.
As you work to identify and mitigate your risk as a fiduciary, the knowledge you gain will strengthen your effectiveness and value as an advisor, and you’ll be able to help grantors attract the most-qualified, appropriate trustees and maintain accountability. And you’ll be able to spot issues before they become costly surprises.
Mitigating and Transferring Risk
Provisions for indemnification and statutory limitations on trustee liability can be written into trustee contracts to limit claims. But these are seldom ironclad. Beneficiaries should learn about trustee roles and responsibilities and ways to hold trustees accountable in a positive fashion. This can reduce friction among advisors and possibly, in turn, the frequency and severity of litigation.
Risk mitigation can help fiduciaries protect themselves and help grantors attract the best trustees for carrying out their legacy plans. But no risk-mitigation strategy will completely reduce exposure to claims.
Grantors should also consider transferring the risk of claims through insurance. And if you’re a fiduciary advisor, here are some things to consider:
- If a trustee becomes the focus of a lawsuit, will the trust be able to advance defense costs during the months (and potentially years) before the final judgement?
- Are there safeguards in place against “bad facts”? When serving as co-trustee with a corporate trustee, both parties should be prepared, in the event of a claim, for the bifurcation of the defense and should understand the ramifications in the event that the independent trustee is uninsured and advancement of defense costs are unavailable from the trust. Both parties can suffer consequences and thus need to protect trustees with fewer legal resources than fellow fiduciaries with deeper pockets should relations become adversarial or bad facts become present.
- What about mental anguish? If a beneficiary feels like a fiduciary is getting things wrong, or acting outside of the beneficiary’s best interests, the outcome can be costly. In Wells Fargo v. Militello,1 the beneficiary sued its longtime trustee over the sale of oil-and-gas properties, and the resulting negative tax-consequence issues that resulted. The trial court awarded $1 million for “past mental anguish damages” alone. And even though total damages were reduced in the end, the appellate court supported its finding that “the trustee was grossly negligent.”
The Bottom Line: Protect Yourself
As long as families seek to pass on their wealth through trusts and other wealth-transfer mechanisms, they will need qualified advisors to protect and maximize this wealth. These advisors will need expert guidance and protection against personal liability as their roles grow more complicated. It doesn’t matter how many players are serving a trust or even if a multinational advisory firm is in the mix; every advisor with fiduciary responsibility for a trust needs to be able to identify, mitigate and ultimately transfer their risk.
Endnotes
- Wells Fargo v. Militello, No. 05-15-01252-CV, 2017 Tex. App. LEXIS 5640 (Tex. App.—Dallas, June 20, 2017).
