Choosing a Professional Trust Department | A Case Study

Why would someone choose a professional trust department rather than an individual to effectuate their estate plan? 

People often assume that individuals are a good choice to serve as a trustee.  While these people might be capable, it is important to understand they are not governed by any regulatory bodies. Individual trustees use the services of an independent third party custodian to safekeep the assets and create the monthly statement for the beneficiary. Legally, every trustee has a fiduciary duty to be accountable to the grantor and beneficiaries of the trust.  A corporate trustee is held to a higher standard of accountability.

Scenario:
John Carter* was a beneficiary of a trust valued at $12 million upon his parents’ death.  The trust specifically designated their family attorney as the trustee. John received monthly statements and noticed suspicious transactions.  He questioned his trustee but did not receive reasonable answers.  John decided to seek outside legal counsel to discuss his concerns.  Counsel agreed there was need for concern and suggested he contact Delta Trust.

Upon further investigation, it was eventually discovered the trustee loaned $3 million to a non-qualified borrower and never collected repayment.  In addition the trustee used trust funds for his personal use, and bought property for his own benefit.  The trustee caused the trust to pay $500,000 toward a loan with his personal guarantee without any benefit to the trust.

The trustee, who is responsible for managing all funds, allowed John to have an unreasonably large monthly budget. John’s spending habits were out of control, and the trust was gravely affected by his outrageous spending.

Eventually under pressure the trustee resigned, and Delta Trust was appointed as successor trustee. Since the trust’s inception, the resigning individual trustee misappropriated over $4 million of the trust’s funds to benefit himself rather than the trust or the beneficiary. Delta Trust & Bank only recovered $1.2 million of the illegally misused funds.

What Went Wrong:

1. Individual Trustee Misused Funds for Own Benefit Gain
2. Uncontrollable Spending by Beneficiary

Correcting the Wrong:

1. Individual Trustee Misused Funds for Own Benefit Gain
As a professional trustee, Delta Trust has a check and balance system in place to prevent fraud and inappropriate conduct. We ensure account safety and companywide accountability by employing the following controls:

• All trust accounts are reviewed on an annual basis by our trust committee which is comprised of Delta Trust & Bank board members, executive management, trust administrators, and investment officers.
• Delta Trust undergoes rigorous internal and external audits.  We are subject to annual federal and state regulatory examinations.
• An Investment Policy Statement (IPS) is created for all managed accounts to outline the specific financial goals and risk and return guidelines.  Delta Trust’s IPS clearly communicates procedures, investment philosophy and constraints to be adhered to by all parties.

2. Uncontrollable Spending by Beneficiary
John’s trust specifically stated the funds were to support the current beneficiary (John) and any future beneficiaries (heirs or other designated parties).  If John proceeded at his previous spending rate, the trust would be depleted by age 75 and no heir would receive funds.  Delta Trust took control by:

• Creating a Spending and Saving Policy (SSP) to coordinate all withdrawals and/or contributions.
• Trust administrators worked with John to establish a realistic budget that aligned with the objectives of the trust.  Trust administrators assisted John in organizing and restructuring his monthly expenses.
• Today, John meets with Delta Trust team on a regular basis to assess his monthly budget.

Currently:
Once Delta Trust was named trustee, a vigorous plan was established to help minimize the damage and balance the needs of the current beneficiary keeping in mind growth and stability needed for the future beneficiaries.  Our Portfolio Manager, Sean Barron, CFA, CFP, helped change the spending rate to conserve the portfolio allocation so the trust would not run out of money.  By getting control of yearly spending and moving the trust to a slightly more aggressive portfolio allocation, the trust portfolio had a 41% chance of keeping with inflation.

 

Names have been changed to enact client privacy.