Helping Families Flourish

 
 

Uncle Morrie is the Trustee: What could possibly go wrong?

September 05, 2018 7:24 PM | Jordan Gitelman (Administrator)

Though a family member in the role of trustee seems free of cost, the actual price tag may be surprising. This should be kept firmly in mind when making a decision about who acts as trustee. The physical and emotional cost of some potential trustees may eclipse the cost of a professional.




The Cost of the Wrong Trustee

It’s more than just the fees.

By Dan Felix, J.D.


Another in the Series on Keys to Successful Trust Administration





"How much?" 


Yes, it's a typical question for any professional service. In my world, I’m often asked about my fees very early in discussions with new families seeking an independent trustee. In fact, sometimes the first question posed is about my fee structure.


This is a fair question. Certainly, when selecting a trustee, one appropriate criterion is the fee.


Generally, individual professional trustees charge on an hourly or flat fee basis. Trustees who aren’t individuals, that is, who are corporations, often charge on a percentage of the trust assets under their management, on top of a minimum fee.


In contrast, family members are often expected to serve for no charge – a holdover custom from when families lived close by and their significant sacrifice of time and tranquility was expected in other domains of life as well.


And where there’s an option for a family member to serve, the thought could be why should we pay fees, when our son (or sister or cousin or our daughter, the business owner) will serve for free.


The falsehood is that “no fee” is the same as “free.”


It’s not.


“No fee” can come with a lot of costs.


First and second, “no fee” ignores the question of fit, as well as the truism that often one gets what one pays for.


More significantly, a true pricing comparison needs to include financial components other than trustee fees alone.

One additional financial element is the value of the peace of mind that the trustee will meet professional standards for both technical work as well as the collaboration with your family and your advisors.


Another necessary financial metric is the valuation of the cost of the wrong trustee. In other words, you should determine how many dollars are at risk because of the very real possibility that the wrong trustee won’t do the right thing.


Here’s a list of some typical costs for choosing the wrong trust trustee. I leave it to you to expand and modify this list for the specifics of your family and situation – and total up the amounts at risk.

The Cost of Squandering your Money. The most glaring example of squandering is the trustee who confuses the trust’s money with his own.


But there are other examples beyond direct theft:


  • Not paying taxes. I’ve witnessed novice trustees not knowing that taxes were due, incurring penalties and late fees for the trust.
  • Not paying for necessary advice. Perhaps this is a variant on being penny wise and pound foolish. Regardless, this cost applies for legal compliance as well as for tax advice and other necessary expertise. Not knowing what they don’t know, novice trustees can get into expensive problems.

Over the years, I’ve brought in a range of different professionals to support me to get to the right result for the family including:


  • Daily Money Managers, as well as CPA’s and investment advisors.
  • Those who facilitate collaboration, including mediators, family dynamics experts and life coaches.
  • Those who value, manage, administer, and sell special assets, such as art, real estate, collections, and firearms, as well as social media and other websites.
  • The range of medical and health professionals, starting at the top with the care manager or care advocate.

Typically, there is a greater cost -- emotional and relational if not directly financial -- for their work that starts in crisis as compared to in advance of crisis. Individuals may reasonably differ on the value of maintaining family harmony and so the price of avoiding family fissure.  And it’s still a cost.


The Cost of Focusing only on your Money. Paradoxically, the administration of a trust can be more costly where it does not support the objectives, goals and values of the family. According to one study, some 90% of families with ongoing trusts report experiencing this disconnect. Further, at least one probate judge reports that this disconnect is a contributing cause to the increase in trust lawsuits she’s seen in the recent past. The cost of a lawsuit in dollars and cents is relatively easy to price: EXPENSIVE. And again, name the price you are willing to invest to insure family harmony.


The Cost of Shutting out your Family. Some put a value on transparency as an end in itself and also because it’s human nature to assume the worst when we don’t know. I’ve seen lawsuits arise when the trustee hasn’t keep family members advised. Again, consider the cost of a lawsuit, and the value of family harmony.


The Cost of Thinking They Know Better. Sometimes others in the trust’s circle have important helpful input. What’s the cost of not considering that?

There’s the example of the corporate trustee that replaced the roof of the beneficiary’s home – but without first consulting the beneficiary living in the house on either the timing, or the color choice for the roof tile. What was the cost of the beneficiary’s self esteem? What was the cost of the beneficiary’s sense of control or for the beneficiary’s frustration in having the work done on an inconvenient day, or worse, having the wrong colored shingle visible every time she walked in the front door?


The Cost of Banishing Common Sense and Compassion. An all too common costly mistake is assuming that the love present in a blended family will maintain despite the loss of the grantor, who serves as the glue of the blend.


One scenario out of the many I’ve seen: The surviving spouse later moves into a relationship with a new significant other, while remaining in the grantor’s house, AND one of the grantor’s children is serving as both trustee and as ultimate beneficiary of the house. There’s an increased risk to both in general anxiety, ill will and fights over repairs and refurbishing.


The grantor’s blind eye that “our family is different” can be especially costly, not just with the blended family. Over the years, I’ve seen in my office many times the younger son of the grantor, not as straight and narrow or successful as his older brother, who is made the beneficiary of the trust with that older brother as trustee. My family dynamics friends nod their head in agreement over the significant cost to the younger brother beneficiary not just for enduring the psychological abuse from his righteous brother, but in terms of the squandering of the best, most empowering use of the trust’s funds.


The Cost of Conflicts of Interest. Even some lawyers don’t understand that the law doesn’t prohibit certain conflicts in the trustscape. The two most significant:


  • A person is legally permitted to serve as trustee, even where he himself is a co-beneficiary, meaning that he has the power to minimize the distributions to other beneficiaries in favor of himself.
  • A corporate trustee who is paid based on the amount of trust assets it holds can maximize those holdings by denying a beneficiary’s requests for distributions.


Even if the trustees have other reasons to deny the distribution, their beneficiaries will understandably suspect that these trustees have not lived up to their fiduciary duty, because these structural conflicts undermine the appearance of independent and impartial decisions. The cost: sometimes ill will, sometimes a hostile relationship and sometimes a lawsuit.


The Cost of Lack of Preparedness. Some successor trustees don’t begin working for the family until after death or disability. And so they run to catch up to find out about the assets, the family, and the trust documents. In those instances where I’m brought in after the fact, I’ve found additional costs inevitable from having to fix situations that could have been more efficiently resolved while the grantor was still around.  And so, factor in the cost of not helping the trustee get up to speed before the time of crisis. Or alternatively, invest some money in advance.


These are just the start of the costs that you’ll find if you dig in around the cost of the wrong trustee. Hopefully you won’t find them too late.



© Daniel Felix, Felix Group, P.C. 2017 all rights reserved



Dan Felix   Dan Felix is an Illinois-based attorney whose goal is to help families flourish. Dan advises & counsels families and their trustees – and in the right situation serves as trustee or other fiduciary. Dan is also a well-regarded speaker on effective trust administration, addressing families, lawyers, and trust professionals. He is the founder of The Chicago Trustee Collaboratory. To contact Dan or find out more about his practice, visit www.The-Professional-Trustee.com.


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