P R O B A T E & P R O P E R T Y
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By Jo Ann Engelhardt and Robert W. Whitman
"What are the most important steps we should take to improve trust administration?" Professor Robert W. Whitman asked this question of the Advisory Board of the ALI-ABA Fiduciary Accounting and Trust Administration Guide as part of his work to update the volume for its third edition. The candid commentary he received from the trust attorneys, trust officers, and trust executives that serve on the board offers a reliable view of what the "real world" thinks fiduciaries should be doing better. This article will examine the issues those in the industry find most troublesome and will propose ways that fiduciaries can respond. Although the article will focus on the corporate fiduciary, the individual fiduciary should find a number of the suggestions helpful, too.
Trust administration is a complex and demanding undertaking with myriad procedures and standards that need improvement. The independent commentators whose opinions were solicited for the Guide, however, returned again and again to several related issues: (1) the need for greater and more effective communication between beneficiaries and fiduciaries, (2) a better model for dispute resolution between beneficiaries and fiduciaries, and (3) a process for trustee removal. What can corporate fiduciaries and their counsel do to address these issues?
At a time when communication has arguably become easier because of the many methods available—e-mail, company web sites, and facsimile transmission of letters, as well as traditional "snail mail" and telephone—trust beneficiaries and their counsel continue to complain of too little communication from the fiduciary. Communication takes many forms, including the account statement that details assets, investment performance transactions, and other activity in a trust; form newsletters; client seminars; letters; e-mails; and face to face meetings. The consensus is that if the fiduciary can improve its communications, it will avoid many problems and mitigate antagonism among the parties if problems occur.
One place to start is the monthly or quarterly statement of assets and transactions. For many clients, the statement is the primary record of the progress being made on the trust account. Are transaction entries cryptically terse or will the average reader understand the monthly activity? Some trust systems have limited space allotted for transaction descriptions, with the result that the client is uncertain what occurred in the trust. Similarly, investment activity and performance may not be presented in a form that is most helpful to the client. At a minimum, the fiduciary should disclose the standards it employs in choosing valuation dates, computing fees, and comparing performance data from one reporting period to the next. Luther J. Avery suggests that trustee accountings comply with the standards promulgated by the Association for Investment Management and Research (AIMR). It is a worthwhile investment of a trust officer’s time to review the first few monthly statements with the beneficiaries to ensure that they understand the statement. Many fiduciaries offer online access to account activity with the hope that this will automate the process and reduce the need for time-consuming personal contact. On the contrary, when a transaction is reported immediately to a client, the potential for client dissatisfaction increases. With a conventional paper statement, generated monthly, the firm can correct clerical errors on its system before the statement is printed, and the client will be ignorant that a check, for example, was mistakenly sent to the wrong payee, so long as the error is caught and rectified before month-end. Online activity means that the account officer should be prepared to call the client first if an error occurs.
Beneficiary Bill of Rights
Many commentators recommend that a fiduciary present a written summary of the trust terms and a statement of both the fiduciary’s duties and responsibilities and the beneficiary’s rights and remedies at the beginning of the relationship. This lets the beneficiary know what to expect and allows the fiduciary to manage the beneficiary’s expectations. At a basic level, a surviving spouse who knows that she can count on four face-to-face meetings during the first year of the relationship may be less likely to complain than one who is told nothing and assumes she will be visited monthly. The situation becomes more sensitive when the terms of the trust require the fiduciary to exercise discretion in making trust distributions. At a minimum, the trustee should explain its procedure for making decisions: what documentation the requesting beneficiary must produce, who serves on the discretionary committee, how often the committee meets, and what redress the beneficiary has if he or she receives an unfavorable decision.
The best practice is for the client’s counsel to discuss the fiduciary’s duties and the nature of the fiduciary relationship while the trust is being drafted. The ACTEC Commentaries on the Model Rules of Professional Conduct observe that by doing so the lawyer better equips the client to select and give directions to fiduciaries. As an aside to drafting attorneys, it is axiomatic that flexibility equals liability in the trust setting. Especially in long-term trusts, the scope of fiduciary guidance provided by the client and presented in the instrument by the drafting attorney is a crucial form of communication to fiduciary and beneficiaries alike. In the authors’ opinion, clauses that give broad authority to act "in the trustee’s discretion" or "as my trustee shall determine" can be problematic—as are clauses that direct the trustee’s action in every conceivable eventuality. Instead, the document should provide the trustee with several touchstones that relate to the principal purposes for which the trust was created. It is also helpful to include "rules of the road," whether to provide a mechanism to resolve disputes between trustee and beneficiary or a tool to deal with unexpected events. For example, the grantor may sanction a third-party arbiter in defined situations or allow a majority of beneficiaries to make demands for funds according to a schedule based on account market values or other objective criteria.
One commentator recommends that the trustee also disclose that, although it has a fiduciary duty to act for the best interests of the beneficiaries, the trustee does not represent the beneficiary, but the trust itself. Similarly, the fiduciary should be attentive to what its counsel is communicating to the trust beneficiaries. They may assume that the trustee’s attorney, who provides information or discusses aspects of the administration with them, is actually representing their interests when this is indeed not the case. The ACTEC Commentaries on Model Rule 1.2, "Scope of Representation," provide helpful discussion on this point.
Uniform National Administration Standards
The task of articulating administrative standards to trust beneficiaries is made more difficult by the fact that there are no uniform national trust standards to guide fiduciary activity. On December 5, 2000, the Office of the Comptroller of the Currency (OCC) issued a notice of proposed rulemaking (NPRM) to enable national banks to engage in multi-state trust operations and an advance notice of proposed rulemaking (ANPR) seeking commentary on whether uniform standards of fiduciary administration should be established (65 Fed. Reg. 75,872 (Dec. 5, 2000)). Although certain core fiduciary principles such as the duty of loyalty or the prohibition against self dealing are universally codified, many important issues receive different treatment in different states. Examples include (1) notice requirements, including which beneficiaries must receive trust statements, (2) standards of trustee compensation, (3) requirements for trust modification or termination, consensual or court-ordered, and (4) whether a trust company may purchase its own proprietary mutual funds in trust accounts.
Effective August 1, 2001, the OCC published its rules regarding the multi-state operations of national banks (66 Fed. Reg. 34,792 (July 2, 2001)). Interestingly, it was unable to establish uniform fiduciary standards, citing "a significant number of issues that will require additional analysis before any determination is made concerning how to proceed." Thus, trust companies now have more guidance on when they may act, but not how they should act. A fiduciary that does business in several states may need to explain the different state rules that govern its actions so that the beneficiaries understand why, for example, notice of a common trust fund accounting in the state of New York is being sent to them in Texas.
Uniform Trust Acts
Even in the case of uniform acts, such as the Uniform Probate Code or the Uniform Prudent Investor Act, not every state may adopt the legislation, or the state may adopt but will alter some provisions of the uniform legislation. A further difficulty pointed out by commentator Steven K. Mignogna is that when a trustee’s conduct over decades is at issue, a court may be uncertain which uniform provisions govern the fiduciary’s actions. Conduct that is acceptable under one statute at one point in time may be improper or subject to criticism at a later date under a later-adopted statute.
Other than the probate litigation bar, nobody, whether fiduciary or beneficiary, participates in trust litigation happily. Nevertheless, neither the trust industry nor advocate groups for heirs or beneficiaries have made significant progress in establishing a practical alternative.
As a first step, suggests Lindsay Weissberg, one commentator to the ALI-ABA Guide, the industry would benefit from an empirical study of trust beneficiary satisfaction. A study could examine the issues that, in addition to lack of sufficient or clear communication, trouble beneficiaries and may lead them ultimately to seek legal redress. Certainly, a clear understanding of the issues that trouble trust beneficiaries can help fiduciaries tailor their administrative practices to prevent contention.
Alternative Dispute Resolution
Although alternative dispute resolution (ADR), both arbitration and mediation, is used regularly and successfully in a number of practice areas, its use to resolve fiduciary disputes has not kept pace. One reason, suggests Mr. Mignogna, is that it is unclear whether a grantor or testator who inserts a mandatory ADR provision in a document can rely on its being enforced. The beneficiaries whom the settlor or testastor intended to bind with the provision did not consent to forgo their day in court. Yet, if the settlor or testator intended his beneficiaries to resolve their disputes outside of the court system, should not that intention be upheld? John W. Porter points out that one of the advantages of using a family limited partnership in the estate plan is the ability in the partnership agreement to mandate arbitration of disputes. Defending the Family Limited Partnership: Litigation Perspective, 35th Annual Philip E. Heckerling Institute on Estate Planning, Special Session Materials.
Using ADR procedures will likely reduce expense, accelerate the resolution process, and permit flexible and innovative solutions to beneficiary concerns. Because trust matters are not always handled in probate or surrogate’s courts, but rather in courts of general civil jurisdiction, whose judges and personnel may have little experience in trust and probate matters, litigants may be better served by finding an alternative to judicial resolution. Moreover, many disputes in the trust arena bring into court individuals who have never had experience with the judicial system. It may be less intimidating to work with an arbitrator or mediator in an ordinary office building than to appear before a judge or law clerk in an unfamiliar environment where clerks are known to enforce rules never set down in print. The generally lower cost of ADR also helps ensure that those with complaints can be heard even if their financial resources are limited.
A final argument commending ADR is that many corporate fiduciaries have adopted a policy that if they are sued, they will defend vigorously and eschew settlement in order to discourage future litigants from bringing an action. This is a common practice for corporations that do not wish to be perceived as "giving in" to litigants merely to make them "go away." In some cases, this policy prevents the rapid resolution of the beneficiary’s dispute with the fiduciary. In these situations, a confidential mediation or arbitration serves both the beneficiary’s and fiduciary’s purposes.
Removal of a fiduciary is a drastic step, and one that the incumbent often vigorously contests. There is no question that fiduciaries can and do act improperly and in those cases should be removed from office. However, beneficiaries sometimes use the threat of removal as a weapon to force their way or bring a removal action to replace a capable trustee in the hope that they can manipulate the successor to act for their interests alone.
The grantor and drafter can take the simple step of including a removal clause in the document to assist both beneficiaries and trustees in this difficult area. A well-drafted clause will include
• the grounds for trustee removal;
• the identity of the person(s) who will determine if removal is appropriate (for example, should this decision be made by a majority of adult beneficiaries, by an independent third party, by unanimous beneficiary vote, or by a committee);
• the notice requirements;
• the required characteristics of the new trustee (if a corporation, must it have a minimum amount of assets under administration or a minimum capitalization);
• the process to replace the outgoing trustee with the new trustee (who will choose the successor trustee); and
• the classes of individuals or corporations from which a new trustee can be chosen (can a corporate fiduciary be replaced by an individual or only by a different corporate trustee, may one choose a member of the drafting attorney’s firm to act, in multiple marriage situations must all sides of the grantor’s family be represented).
Probably the most difficult of these elements to draft is the enumeration of grounds for trustee removal. As discussed above, many beneficiaries become dissatisfied because of lack of trustee communication or because they have unrealistic expectations about the administration process. Predicating trustee removal on a failure to meet general standards of responsiveness is not helpful, but the removal clause could run to several pages if the drafter attempts to enumerate in detail what are often subjective grounds for dissatisfaction. In their article "Trust Drafting for the Unforeseeable," Frederick R. Keydel and Harvey B. Wallace recommend that, when a removal for cause provision is included in a trust document, an independent trustee be given the power to "block the removal and turn the question over to the local court— not to determine ‘cause’ in the usual sense but only to determine if the removal amounts to an improper effort to influence the manner in which the independent trustee [exercised discretion]." 35th Annual Philip E. Heckerling Institute on Estate Planning (2001), Special Session Materials (emphasis in original).
No Fault Trustee Removal
Several commentators, including Standish Smith and Tara Ray, advocate a "no fault" removal clause. The obvious advantages include a prompt change of trustee at minimal cost and little disruption to the ongoing administration. Such a clause can easily be included in the trust document if it is appropriate. The drafter should be certain, however, that he or she understands the grantor’s wishes and family dynamics before including this language. Other commentators recommend that the right of removal be codified so that there is a statutory right of removal or a presumption in favor of removal that the fiduciary would have to overcome.
Were no-fault removal to become the standard, it is intriguing to ask whether a grantor could include an exculpatory clause in the document to insulate the fiduciary and prevent removal by the beneficiaries. Courts are often reluctant to uphold these clauses wholesale to protect corporate fiduciaries in cases of alleged failure to manage trust investments properly, finding that their claims of expertise and skill require them to be held to a higher standard than the nonprofessional trustee. See, for example, In re Trusteeship of Williams, 591 N.W.2d 743 (Minn. Ct. App. 1999). But a trustee may quite properly insist upon exculpatory language if it is being asked to exercise powers to amend the trust for tax-savings purposes.
In certain situations, the beneficiaries may wish to remove a fiduciary for reasons other than poor performance. It is common in recent years to find that the corporate trustee named in the document has been taken over by or merged with a new institution. Beneficiaries who were pleased to work with a local institution that had been part of their community for many years may be dismayed to find their account is now being run by strangers in a different state.
The Fiduciary’s Right to Resign
The flip side of a provision allowing trustee removal is a provision that permits a trustee to resign quickly and easily if it wishes to do so. For purposes of this discussion, assume that the motives for the proposed resignation are reasonable and that a successor is willing and able to act. A trustee may wish to resign its duties for a number of reasons, including beneficiaries with unreasonable expectations, highly litigious beneficiaries who have a personal animus toward trust company personnel, geographic distance from beneficiaries, a change in corporate mission, or a severe depletion of trust assets (for example to pay medical expenses) to the point that the costs of professional administration are prohibitive. As Standish Smith observed about such a clause, it will "encourage the trustee to step aside gracefully when requested to do so." Sometimes, knowing when to walk is as important as knowing how to talk. If the trustee has made its best efforts to ensure good communication and effective administration without meeting the beneficiaries’ requirements, the best course may be to resign.
Jo Ann Engelhardt is the managing director of the Bessemer Trust Company of Florida in Palm Beach, Florida. Robert W. Whitman is a professor of law at the University of Connecticut School of Law in Hartford, Connecticut.