Who is Responsible When a Trust Shows Poor Economic Performance?
Poor performance from trusts, coupled with today’s financial and accounting scandals, have fueled investor concerns over potential problems with stewardship by banks and other trustees. While the stock market is often a factor in poor performance, fiduciary negligence may also come into play and you may have reason to consider a trust challenge. A financial advisor and other interested persons should direct trust beneficiaries to an attorney who has no prior relationship in the trust and who can objectively review the trust’s performance, assessing whether the financial advisor has properly fulfilled its fiduciary obligations as a trustee of a family’s wealth.
Historically, trustees have been quasi-family members, picked by family patriarchs to faithfully serve the beneficiaries. They have been insiders who (have) enjoyed a life-long relationship with a family. In fact, some families have been so married to a trustee or trust advisor that they never thought of asking questions.
The relationship between trustees and beneficiaries has changed significantly in several ways recently. Beneficiaries are much more savvy and informed about financial performance expectations. Beneficiaries can more easily question trust performance. Clients and financial advisors should consider the following in determining whether an institution or individual has properly performed the duties of a trustee.
Standard of Care
Trustees are expected to administer a trust with the same level of care that they would use with their own personal finances. If a fiduciary has obtained its appointment as a trustee by representing that it has special skill to act as a trustee, it may be held to an even higher standard of care.
Duty of Undivided Loyalty
Banks and other trustees have a duty to make decisions on behalf of the trust that is advantageous to the beneficiaries and no one else. However, in the increasingly complex world of investments, many banks have established their own proprietary mutual funds, which they use mutual funds as trust investments to the exclusion of other mutual funds, the duty of loyalty is compromised, particularly when the performance of the bank’s mutual funds is less favorable than other available funds.
In the volatile world of investments, the financial advisor must go beyond the simple question of whether the investments are losing money. Instead, the advisor must analyze the investments to determine whether the losses experienced by the trust are greater than the losses demonstrated by the broad-based market indices. Is the account properly diversified, or is it invested heavily in a narrow segment of the investment offerings? Are the investments too aggressive for the circumstances of the trust beneficiaries? The trust portfolio must be carefully analyzed to determine the reason for the trust’s poor performance.
Administration of a trust is akin to managing an investment portfolio. If a trustee’s fees exceed market standards, beneficiaries may have a case for dispute.
Communication With the Trustee
The trustee has an obligation to keep the beneficiaries informed of the trust’s performance and must make certain that the trust’s investments are consistent with the needs or constraints of the beneficiary. For example, bonds would be an improper investment when a beneficiary is in a high tax bracket but would be proper for someone in a low tax bracket. The timing of capital gains and losses can have an effect on taxes. There must be effective communication between the beneficiary and the trustee. A breakdown in communication is symptomatic of other problems.
The first step is initiating a review of all relevant documents. The governing trust documents must be closely reviewed to determine if the creator of the trust imposed any limitations on the trustee. Given the complexity and specificity of these issues, trust disputes are best referred to lawyers who concentrate in estate and trust litigation and will contests.
Request an Accounting of the Trust
If a beneficiary seems to have a valid trust dispute, then the beneficiary should file a formal request for the trustee to provide a full accounting of all financial transactions associated with the trust. Such a formal accounting is, in most jurisdictions, a requirement before the dispute can be presented to the court. Because such a formal accounting usually covers a long period of administration, this request needs to be made as soon as the beneficiary or advisor begins to contemplate taking formal action against the trustee.
The final arbiter of a dispute over the services of a trustee is through the court system, usually through its probate court, part of the New Jersey Superior Court. Once a formal Complaint is filed with the court, a beneficiary must specifically set forth his/her allegations. This essentially begins a lawsuit between the trustee, on one hand, defending its actions, and the beneficiaries, on the other hand, advancing their complaints. Like any other lawsuit, discovery ensues with depositions of the trustee and requests for documents in the possession of the trustee and others. Frequently, a financial advisor is retained to serve as an expert to analyze the investment performance. Having legal counsel who concentrate in such work are vital to the effective pursuit of this type of action.
To discuss your NJ Trust matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org. Please ask us about our video conferencing consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Trust Law Attorney