Charting a Safe Course for Trusteeship

Claims against CPAs involving trusteeships have been slowly rising in frequency and dollar amounts over the past 15 years. There is often little guidance for trust work unless the trustee petitions for judicial instructions, a relatively simple legal process that takes a month or so but can save a lot of grief.

The most common risks associated with trusteeship include:

• A lack of understanding of, or appreciation for, the duties and responsibilities of a trustee
• A lack of clear and consistent communication and disclosure between the trustee and the beneficiaries or other interested parties
• A conflict of interest (or the perception of a conflict) on the part of the trustee
• A lack of appropriate engagement checks and balances on the activities of the trustee
• Dysfunctional relations among the beneficiaries, settlors (those who create a trust) and prior trustees
• Fee and billing (disclosure) issues
• Weak or controversial investment strategies (lack of disclosure)

The extent to which a trust attorney will be needed and the relationships among those involved with a trust, which are often dysfunctional and major sources of risk, should be considered closely before becoming involved with a trusteeship. What is the potential for dispute among the beneficiaries and the settlor? More than half of Camico’s trustee claims are the result of dysfunctional family relationships.

The trustee services provided by the firm member and the non-trustee services (e.g., accounting, tax) provided by the firm should be clearly distinguished. While the trustee is responsible for supervising trustee work done for the trust, the firm is responsible for reviewing and signing off on the non-trustee services performed by firm members. A non-trustee partner of the firm should perform the non-trustee services for the trust. If that’s not practical, a non-trustee partner should at least review and sign off on the non-trustee work.

In other words, the more bright light on the work, the better. Client screening procedures and engagement letters should be used so that the relationship between the firm and the trustee is as “arm’s length” as possible.

Other crucial points include:

• Any successor trustee has the duty to investigate and report upon the activities of the prior trustee, unless the trust document states otherwise.
• The trust document can provide protection to a trustee by requiring the trust to defend and indemnify the trustee against allegations of negligence. The trust may also contain a clause limiting liability of the trustee to gross negligence only. This clause will protect the trustee from simple mistakes.
• Discretion clauses can be helpful. For example, if the trust owns a business that the trustee will likely need to dispose of, the trust document can grant wide discretion to the trustee to determine the best way to dispose of the business.

In the area of investments, the trust document can provide some “safe harbor” protection by allowing the trustee to select a “reputable investment advisor.” This does not relieve the trustee from the obligation to monitor his or her advisors in a reasonably prudent manner.

Any trusteeship accepted by a member of the firm should be described and listed so that all owners of the firm are aware of the trustee engagement. If the firm or any of its members are providing other services to the trust, a separate engagement letter for those services is suggested.

Consistent and periodic reporting to settlors and beneficiaries is critical. Periodic reporting should include any financial and other information necessary for all interested parties to be fully informed. Even if not required by the court, periodic reporting will help:

• Ensure that all affected parties are kept informed, and
• Start the clock ticking on the time permitted for anyone to object to an action or decision of the trustee.

Additional special reporting can be used to garner approval from the beneficiaries for a specific act or transaction. The more information a trustee provides the beneficiaries, the more inclined they will be to approve the trustee’s recommendations. In addition to the formal methods of reporting, the lines of communication should be kept open with all beneficiaries. Any beneficiary who feels left out of the loop is more likely to believe that the trustee is not acting appropriately.

As in other types of engagements, success in a trusteeship greatly depends on keeping clients and beneficiaries satisfied. The more people involved, though, the greater the odds that at least one of them will become dissatisfied. Keeping all of them satisfied can be next to impossible.

The trustee, as a matter of risk management, certainly desires to operate on the basis of consensus among interested parties, but the trustee ultimately must follow the trust’s instructions and dictates, even if it kills consensus. In the desire to seek consensus, the trustee should not do things contrary to his or her charge.

Given the right conditions to administer a trust in accordance with its instructions, the ability to remain impartial, and the ability to protect against claims, trust work can be satisfying and rewarding. If those conditions are not evident, though, it may be wise to simply pass on the engagement. Call Camico’s advisory hotline at (800) 652-1772 for further advice and materials on trust work.