Navigating the Perilous Waters of Trusteeship: The Issue of Control

Shahnaz Mahmud
Published Date:
Jul 1, 2014

Whom do you trust? This is a sensitive question for almost everyone. But in the family office world, it's even more important. Author George MacDonald summed it up best: “To be trusted is a greater compliment than being loved.” The NYSSCPA Family Office Committee’s fourth annual conference in February 2014 addressed the topic of trust—specifically, a trustee’s obligations and the pitfalls that such a trustee might face.

Susan Schoenfeld, founder and CEO of Wealth Legacy Advisors LLC and chairwoman of the NYSSCPA Family Office Committee, opened up the discussion with the issue of control: “In real estate, we all know what the three rules are: location, location, location. … In estate planning and the trust world, the three rules are control, control, control.” She noted that many clients choose trusts because they like to impose control—but is this always a good idea?

Barbara Hauser, founder of Barbara R. Hauser LLC in Minneapolis, Minn., recalled one of her first law firm clients, a 65-year-old man whose money was held in a trust with payments that began at age 60. He was fed up; he wanted to manage his own money. From there, Hauser developed an expertise in breaking rigid trusts while helping beneficiaries add a bit more flexibility to their lives.

Bent on Control

“If you have a client who is bent on control, as many of them are, keep in mind it may not last,” said Hauser. “They may run into someone and find a way to go to court and break whatever that trust was."

Hauser proffered another example, fast-forwarding 20 years in her career as a lawyer, recalling when she was recruited to give advice full-time to a famous billionaire. His charge to her was to find a way to control his family for the next 300 years using trusts.

“Trusts are filled with a desire on the part of the settlor to impose control for all kinds of reasons,” Hauser underscored.

Other examples trickled out. Schoenfeld noted that when she previously chaired the Trust Committee for a well-known national trust company, she had a client whose trust distribution began at age 70. The client, a grandmother of 60-plus years of age, told Schoenfeld her parents never trusted her. Hauser added to this another example from her vault of trust horror stories: a client asked her to set up a trust for her 50-year-old daughter. When Hauser mildly protested, saying the daughter seemed old enough to handle her own affairs, the client made it clear it was the husband he didn’t trust.

Laura Twomey, partner at Simpson Thacher and Bartlett LLP in New York, said she has witnessed this play out both ways. There’s the classic scenario, where the amount of control that’s imposed by a trust is “just overkill” for a particular beneficiary. It could be for someone who is successful in his own right, who is fiscally responsible, yet having to deal with the onerous restrictions of a trust. For example, Twomey is presently dealing with a trust that pays out all of the income to the patriarch. The issue? “That’s plenty of money for him,” she said. “But it doesn’t allow for any distribution to his children.”She added that, throughout her career, she has worked periodically to find ways to enable the children to benefit from the property of the trust while remaining within the terms of the trust agreement so that the trust can be directed in a much more flexible way. Referring to the patriarch, Twomey highlighted that this would have enabled him to run his life and his family the way that he wanted to.

At the other end of the spectrum, Twomey has seen situations where beneficiaries really could have used a bit more control, benefitting from a more limited stream of income or limits in the types of investments that can be requested of the trustee. “One of the difficulties with trusts is you really do have to plan so far in the future,” she said. “You don’t know exactly what your family is going to look like 20, 30, 40 years down the line.”

The stance that her firm takes is to build a lot of flexibility into its trusts. She works with clients to develop a philosophy about trusts, Twomey said. Important questions to ask include the following: How important is this level of control? Do they really like the trust because it provides tax efficiency, asset protection, protection from spouses, or assurances that their children will get on board with the trust?

“For example, maybe we will build in a power for the child to serve as a trustee at a particular age, maybe even control the investments or, at least, be able to remove the trustee in certain circumstances,” Twomey illustrated. She finds more and more that the children are very interested in the trust because of that asset protection and the protection from domestic issues, such as divorce. Even if there is a happy marriage, stipulations have been made. “It’s an excuse for clients to deal with their spouse in a way that’s not hurtful to the relationship,” she said. “That kind of alleviates some of the pressure they may otherwise feel for spending on a particular category. …I find that with beneficiaries, if you educate them properly, they are actually quite interested in the trust.”

Schoenfeld added that getting the family involved at the outset is incredibly useful because, when dealing with these “major control desires,” it's the responsibility of the professionals to counsel them “that there is a flip side and a flip message to that." This flip side relates to the issue of trusting the trustees.

Note: This is the first part in a two-part series that will be continued in the August 2014 issue. Come back next month to find out more about trusting the trustees and handling conflicts of interest.

This article originally appeared in the February 2014 issue of Family Office Review. Copyright Family Office Review, 2014. Reprinted with permission.

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