Case Study Lessons for Making Trusts Work
Too many families feel the pain and expense of problems with their trusts. Mis-steps in administration, often well-intentioned, derail trusts into legal, financial and family breakdowns.
This article uses real life examples to illustrate how professionals such as myself— known as Independent Trustees— work with families and their advisors to put the families and their trusts back on track for success.
Specifically, what follows is a case study of a family that did not adequately prepare for trust administration. You can see several truths for successful trust administration by studying what went wrong with this family and their trust. Given the immense financial and emotional cost that this particular family continues to pay, the learning is invaluable. Don’t let this happen to you— or to your clients!
Of course, I’ve modified various key facts to further help preserve this family’s anonymity.
For this family, I was brought in as a replacement trustee in the hopes of not just avoiding litigation, but more proactively to try to help them and their trust get back on track. It’s sobering that the critical importance of the financial fiduciary to the success of the trust continues to be under-appreciated. Some understand it directly and painfully only when things start going wrong.
So here are a few proof points of the difference the trustee can make in the context of cleaning up the mis-steps of both the prior trustee and even the settlor — that’s the person who envisioned this enterprise and funded it with her money.
These issues came to a head for me while knee deep in trying to clean up the crises of this family’s trust. Doing my due diligence in discussing the situation and the solutions with the various family members, one of the settlor’s descendants asked me if his ancestor set the family up for failure by the type of trust she prepared. In other words, she was asking if grandma made a mistake in writing the trust the way she did!
That’s a charged question and implicates the resolution of the open administration issues, as well as for the foundation of this family’s legacy!
And yet, there was evidence that both the trust and the family were, indeed, failing.
Consider that though the settlor envisioned the trust to be an ongoing enhancement to the lives of all her descendants, various problems appeared during the administration of her successor.
Though as the successor’s replacement, I have since been able to take steps to address the problems individually and globally, it remained to be seen how successful our clean-up would be. Among other things:
- One side of the family had stopped receiving information— and benefits! I gained access to the accounts, resumed information flow and got agreement to make interim distributions to all the branches of the family. Transparency builds trust and cooperation!
- The family was lawyering up. One of the members from that deprived side of the family hired an attorney claiming foul, and the successor trustee already had his attorney. I engaged both the attorneys in ongoing conversations to address the issues of their clients and also to help move the trust administration toward healing and success, and away from court. Fostering collaboration builds consensus!
- The two sides couldn’t agree on any other family member to step in as trustee. Their confidence and trust with each other was low. Fortunately, one of the few things they agreed on was hiring me, an independent professional trustee to put out the fires and work to avoid future ones. Investing in the necessary support can yield dividends!
- No one was quite sure of the exact amount of assets available. There wasn’t even an unofficial accounting. I directed the creation of the accounting that would be updated monthly and remain available 24/7 to the family through secured internet access. Technical compliance is foundational!
- The corporate co-trustee had long ago resigned, and no corporate trustee would serve given the wide discretion that the grantor wanted the trustees to exercise to make sure her hard earned funds got to the right descendants. I obtained agreement to forgo a corporate trustee, at least for the interim. Taking prudent risks may be necessary!
Against this stack of evidence, I took a breath before responding as to whether grandma had burdened her family with an ill-fitting trust. I responded and invested a part of my professional leverage to explain that it may not be exactly as it appeared.
Trust Foundation: The settlor’s vision. I started with the big picture: “Your ancestor’s vision was magnanimous,” I said. “That vision was to pay for the education of all of her descendants! That’s an unrealized dream for many parents, let alone for extended families.”
And, I appreciate what she did in her trust document. Her trust document creates a thoughtful structure to accomplish her vision. She— and her drafting trust and estate attorney no doubt— resolved many of the details in the trust document. To give one example: she established a set asset investment mix to remove the conflict between present beneficiaries wanting to maximize present returns, on the one hand, and on the other, future beneficiaries wanting to grow the pie.
And then I shared with her what I am convinced are four of the true causes of the breakdowns that she and her family had hired me to help them with.
1 ~ To be successful, the family needs to know what the trust says. Contrary to this fundamental concept, these trust documents were not provided to or accessible by the family. To start, the documents were not distributed to all the appropriate family members.
But, even if they had been, the family couldn’t fully understand them. That’s because these trust documents, like most trust documents, were written in a special language that is decipherable only by lawyers.
Now trusts need to contain legalese, just like the designs for airplanes need to contain their engineering technicalities. Without those technicalities, the plane can’t fly and the trust doesn’t work.
And also, like airplanes, we need to get the information in another form to master how to fly them, and to set the expectations for those who are being flown.
So, the memos that I prepared to explain the trust in simple, plain English which the family appreciates now, would have also been helpful many years before. These memos highlight the provisions which required that all the descendants were eligible to receive scholarships, not just on one side of the family.
2 ~ The family needs to develop skills. Telling was the failure to coach the family member trustee in how to do her job. Though she received some piecemeal and mostly technical instruction from the professional advisors, there was a total absence of any support for the family. So breakdowns are not surprising given that the family wasn’t informed about the provisions of the trust document or their ancestor’s vision.
So, this family was feeling the painful impact of the insufficient investment in having the family understand how the trust works, and to let them practice. That includes, but is far from limited to the successor trustee. After all, the entire family needs to know how the trust works. It’s like expecting someone to be a good citizen without giving them any knowledge of how democracy works— or seeing it in action in their precinct. There is an art and science in being an excellent beneficiary as well as for being an outstanding trustee. Neither good intentions or solid character makes up for lack of knowledge and experience.
The core structure for developing a shared understanding is through family meetings. Given the geographic dispersion of the family, I couldn’t bring everyone into the same room, but have used emails and other communications to enhance common understanding. They’ve also permitted me to enhance their skills by bringing them into some of the administration’s decision-making as well as delegating select tasks to them.
3 ~ Integrating Trust and Family Cultures. It’s said with good reason that culture eats structure for lunch. Role-play and field-testing are simple tools to not only practice the technical structure, but to try it on and make sure it fits. Forced-fitting at the time of crisis is difficult— and all the more so, because the settlor, who could have made tweaks as well as bigger changes while alive, is no longer available.
In this family’s situation, because of the breakdowns on the above two items, there was not an opportunity to sync the trust with the culture of the family. This is not easy or even always possible in advance of need. And it can be all the more difficult while engaging in crisis management.
The blessing in this family is that there is a general spirit and sensitivity to making things right and for a non-punitive healing. I’ve offered options for a reimagined trust, consistent with their ancestor’s vision. Reimagining the trust has allowed the family to explore the repair of the prior mis-steps in excluding parts of the family.
4 ~ Pay for adequate preparedness. There appears to have been inadequate professional counseling and coaching to successfully launch and manage administration. Any number of advisors could have helped deal with the lack of accountings and the corporate trustee resignation as well as family governance and preparedness. That starts with being retained and then heeded.
And, of course, the necessary advice extends far beyond the technical. Though a trust will fail around breakdowns of the many technical requirements of administration, a trust will not succeed merely from meeting all of those technical niceties. Trust administration is bigger than the technical— it is the vehicle families ride for intergenerational transition. Families deserve a smoother ride than they often end up with.
The advantage of investing upfront in this work is contained in the old truism that the ounce of prevention is worth a pound of cure. For one, I guarantee my client families that they will save both money and pain by engaging in advance preparedness. And this family is now well aware that they are paying for a full load of pound-of-cure advisors!
It’s easy to point fingers at the successor, or even at the settlor, or her attorney. The truth is that this type of advance work, so obvious in hindsight, is still too infrequently compelling in advance as an invaluable investment in the ounce-of-prevention.
So, instead of engaging in the fundamentals, breakdowns happen, causing considerable pain and expense.
And then the family wonders why grandma wrote such a lousy trust.
Are you going to let this happen to your families?
© 2018 – 2023 Daniel P. Felix, all rights reserved.
