Objectivity and Trust are Critical for Long-Term Success

In trust planning, one of the most important decisions to be made is the appointment of a dependable trustee to ensure that a family's wealth is managed and distributed according to the family's wishes. When selecting a trustee, many people consider a trusted family member or a close friend for the role. Family members and friends, however, rarely have a full understanding of the issues, responsibilities and time involved in the process. Additionally, these “insiders" often find it difficult to maintain objectivity and impartiality when dealing with sensitive and emotional family matters.

Below are two scenarios that we recently encountered and how we worked with our family office clients to resolve their concerns.

Scenario #1: Co-Trustees Misused the Family's Assets for Personal Gain

 

Beneficiaries Unprepared for Wealth

  • Two beneficiaries received a multi-million dollar estate from their father in a trust

  • The father did not prepare his children for the wealth, nor did he discuss his wealth with his children

Executor and Co-Trustees Named

  • The father named his business partner and his nephew as executor and co-trustees of his children's trusts and gave them control over all of the assets

  • Given their relationship, the co-trustees are familiar with the family dynamics and have relationships with the beneficiaries

Lack of Role Clarity & Abuse of "Power"

The co-trustees made several major business decisions independently, without consulting with the beneficiaries.

  • The beneficiaries did not receive communications or statements regarding the administration of the estate and trusts, nor did they receive distributions from the trust for several years

  • When the beneficiaries questioned the co-trustees, the situation became tense and threatening, with the cousin (one of the beneficiaries) reminding them of “who had the real power and control over the funds"

  • After five years without distributions, the beneficiaries sought legal counsel and the judge compelled an accounting audit of the trust

Mismanagement Uncovered

  • While the beneficiaries did not receive any distributions for five years, the co-trustees paid themselves unusually high trustee fees, took lavish trips and bought expensive dinners for themselves and their spouses using the trust funds

  • One of the co-trustees sold several large stock positions from the estate (amounting to several millions of dollars) and reinvested the proceeds in various companies in which he was personally invested and/or served as a board member

  • In addition to creating a conflict of interest, many of the reinvested positions were inappropriate trust investments

Litigation

  • After two years of litigation, the co-trustees and beneficiaries reached a court-ordered settlement in which the co-trustees repaid their trustee fees, were mandated to reimburse the trust for any lavish expenses, and were mandated to resign immediately

  • The beneficiaries were advised by their counsel to name a corporate trustee due to the size of their trust funds. Counsel also advised the corporate trustee that the beneficiaries select should use an objective and professional approach to trust administration, and have expertise in prudently managing complex assets and LLC structures

After a year of interviewing several corporate trustees, the two beneficiaries named BNY Mellon, given our approach, depth and sensitivity of our Fiduciary team. We worked with the beneficiaries and their counsel to modernize their trusts, while maintaining the original intent of the settlor. The result of this unfortunate series of events goes beyond monetary fees. The relationship between family members has been permanently broken. Additionally, this situation could have potentially been avoided with proper guidance and advice.

Scenario #2: Trustee Lacked Expertise Needed Complex Trust Structure

Three beneficiaries received a multi-billion dollar estate from their father, which was established as a trust

  • The trust had a jurisdiction in Michigan, triggering highly punitive state income and estate taxes

  • The deceased father left a billion dollar operating business in the trust for his children (the beneficiaries)

  • One child was involved in the day-to-day operations of the business and was very entrepreneurial

  • After several years, the children agreed to sell the profitable business in trust. As a result of the sale, they needed more sophisticated advice

The Search for a Corporate Trustee Begins

  • Although a trustee was in place, with the guidance of their legal counsel, the beneficiaries began an exhaustive search for a corporate trustee

  • The criteria included: experience in large, complex trust funds, which included an operating business; objectivity; and a professional approach to daily trust administration

  • Importantly, the family needed a corporate trustee that was able to service trusts in the state of Delaware given local regulatory requirements

Tax Savings and Solution

After nearly a year of interviewing several corporate trustees, the beneficiaries named BNY Mellon

  • Our Family Office team worked with the beneficiaries' legal counsel to modernize their trusts, while still maintaining the original intent of the settlor

  • A critical decision in the process was to carefully decant (the legal process of revising the current trust documents to another trust situated in a more beneficial state jurisdiction) the trusts to Delaware before the sale of the business. This process saved the family over $2 million in Michigan state tax

At BNY Mellon Wealth Management, our dedicated Family Office team has helped many families with their trustee and fiduciary needs. For more information on our Corporate Trustee service, please contact your BNY Mellon Wealth Management Family Office relationship manager.

  • This material is provided for illustrative/educational purposes only. This material is not intended to constitute investment or financial advice. Effort has been made toensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of all ofthe investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only afterconsultation with professionals who have reviewed your specific situation. The views of the author are his own and may not reflect the opinion or views of BNY Mellon.BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.

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