Editor’s Note: “War Stories” are drawn from the claims files of Camico, a CPA-directed insurer and risk management program for accountants, and illustrate some of the dangers and pitfalls in the accounting profession. All names have been changed.

Hal McCourt, CPA, serves as co-trustee of the Porter Family Trust, along with Gil Armstrong, a trust attorney who drafted the trust document for Carl and Connie Porter.

According to the document, the Porters’ children, Alan, Jordan and Eleanor, are each to receive a one-third share of trust assets when Carl and Connie die. Now in their mid-80s, Carl and Connie have developed health problems and their mental faculties have declined. Alan, having been trained in geriatric care, tends to the couple on a daily basis.

Jordan is so busy with his career that he has little time to help Alan with caregiving duties; Eleanor, who is struggling financially, visits her parents as frequently as she can, which isn’t often. Alan begins to resent what he perceives to be his siblings’ lack of interest in helping to care for their parents. He persuades Carl and Connie to execute a quitclaim deed, granting him ownership of the Porters’ house to the exclusion of Jordan and Eleanor.

McCourt and Armstrong agree with Jordan and Eleanor that the new deed violates the intention of the trust document, and decide to litigate the matter in order to recover the house. Armstrong chooses to head the litigation against Alan, and hires an attorney who specializes in probate law to assist him.

The hired attorney executes a series of legal maneuvers that protract the proceedings, causing legal expenses on both sides to soar. To further add to the rising costs, Armstrong decides to file elder abuse actions against Alan and hires an additional attorney who specializes in such matters.

After a year of legal activity, McCourt requests an accounting of the legal expenses from Armstrong, who eventually submits handwritten check registers, many of which are illegible. McCourt asks for several clarifications to the accounting provided by Armstrong, but none are forthcoming.

McCourt attempts to put together a semblance of accounting for the legal expenses incurred by the trust and is shocked at the expenditures, now approaching $500,000, for a case that still hasn’t gone to trial. Jordan and Eleanor are also shocked by the expense. The Porter house is worth about $900,000, and they are upset about the prospect of the fees outstripping the value of the house.

Meanwhile, Carl and Connie Porter have died. McCourt finally hires his own attorney, who petitions a probate court to order Armstrong to provide an accounting of his legal fees. By the time the court order is received by Armstrong, expenses are approaching the value of the house, making the litigation even less worthwhile.

Jordon and Eleanor hire their own attorney to help sort out the problems with the trust. Their attorney convinces them to replace McCourt and Armstrong as trustees and to install a new court-approved trustee.

The litigation results in a finding of elder abuse against Alan and in an award of three times the legal fees, plus the value of the house, to Jordan and Eleanor. By now, however, Alan has declared bankruptcy.

The court-appointed trustee then asserts that McCourt has failed in his duty to compel Armstrong to account for his expenditures. The trustee also contends that McCourt and Armstrong should be surcharged for the trust funds spent without being reported and monitored—about $1 million.

Loss prevention tips

Claims experience shows that one of the most common sources of risk in trusteeships is a lack of understanding of—or appreciation for—the duties and responsibilities of a trustee. CPAs should ensure that they are educated and competent in the skills needed to render trustee services before attempting to offer them. They should also avoid subordinating their judgment to attorneys and other professionals in order to provide competent services to a trust.

There is often little guidance for trust work, unless the trustee petitions the court for judicial instructions regarding the performance of his or her duties—a legal process that can stave off many problems. Without this kind of formal direction regarding trust administration, some trusts end up being so poorly managed that they end up in court, anyway. In such a scenario, trustees may need their own attorneys to protect themselves and the trust.

Dysfunctional relationships between beneficiaries are common sources of risk in trusteeships. If the CPA sees evidence of dysfunction before accepting a trusteeship, it is probably wise not to accept the engagement. Co-trusteeships are also a source of risk, especially when there is a lack of cooperation or agreement among the trustees. Fee and billing issues are often problematic, as well. Be proactive in the careful management of these issues in order to avoid major problems.

Ron Klein, J.D., CFE, is risk management counsel for Camico. He has been with the company since its inception in 1986 and managed the claims department for 20 years.

For information on the Camico program, call Camico directly at 800-652-1772, or contact: (Upstate) Reggie DeJean, Lawley Service, Inc., 716-849-8618, and (Downstate) Dan Hudson, Chesapeake Professional Liability Brokers, Inc., 410-757-1932.