Care in Setting Up Family Trusts Can Head Off Problems

“How do you get a small fortune? Give a bank trust department a large one,� goes a popular banking industry saw.

But to Martin Crusky Jr., it’s no joke.

One of seven heirs to a $6-million estate, Martin--whose real name has been changed in this column because of litigation--was one of the beneficiaries of his father’s living trust.

The trust was made up of stocks and tax-free bonds--and named a local bank as the successor trustee. When the elder Crusky died, the bank got sole control of the assets. Martin Jr. and the bank have been at odds ever since. Martin says it’s because the bank sold all the trust’s assets, triggering a whopping tax bill while dramatically reducing the trust’s investment potential.

He estimates the bank’s management cost the trust’s heirs $260,000.

The bank argues that Martin’s interests don’t always coincide with those of the other beneficiaries, who agree that the bank’s primary duty is to preserve trust assets. While some of the seven heirs might prefer to keep money in the stock market, where there’s more potential for impressive returns, stocks also pose risk to trust principal. The bank says its actions were reasonable, even though the trust missed out on the dramatic rise in stock prices. Hindsight is always 20-20.

Still, the acrimony between the bank and Crusky is so great that the bank’s attorney even encouraged Martin to sue--but added that the bank would use assets from the Crusky family trust to defend itself.

Martin’s story isn’t unique. In fact, it’s been played out so many times in so many cities that a support group, Heirs Inc., has sprung up specifically to advise heirs on how to wrangle with bank trust departments.

Nor does the problem affect only the rich and famous. The median value of trusts administered by Federal Reserve member banks is just $250,000, says Standish H. Smith, founder of Villanova, Pa.-based Heirs. There are roughly 11 million Americans who are either direct or secondary beneficiaries of these trusts, he says.

“There are a whole host of transgressions that banks commonly indulge in,� Smith adds. “There is a lack of disclosure, a lack of accountability. The only way to describe it is nefarious.�

Bankers deny they make poor corporate trustees. Unhappy beneficiaries make noise but the vast majority of satisfied customers never are heard from, says Jayne Lipe, executive vice president of Overland Bank & Trust in Fort Worth.

However, some acknowledge that heirs can have trouble with any corporate trustee, if the benefactor--the person who originally set up the trust--wasn’t careful about how the document was written.

Unless there is a co-trustee or a so-called removal clause, heirs can find it difficult--if not impossible--to remove an unresponsive corporate trustee.

In most cases, unless all heirs--including secondary heirs, who inherit money only after the primary heirs die--are in complete agreement, beneficiaries of a trust must go to court to get a corporate trustee removed. Most trusts allow the corporate trustee to use the trust’s assets to fight the removal.

Say you think the bank serving as trustee for your family’s estate invests the trust’s money too conservatively--a common complaint, according to both sides. However, your grandson, who is listed in the trust as a “remainderment� beneficiary--he inherits if there’s something left when primary beneficiaries die--petulantly refused to sign a petition asking for the removal of the bank as trustee.

All the other heirs agree with you. But because the agreement isn’t unanimous, you have to go to court to have the bank removed as trustee.

You hire an attorney; the bank hires an attorney. You pay your legal bills; your trust pays the bank’s legal bills. If you win, you get to move the account. But there’s a good chance that you’re still on the hook for at least your own legal expenses. If you lose, you pay all the expenses for both sides and your inheritance stays where it is.

What are the chances of winning? Attorneys say trust laws favor corporate trustees, so the bank’s behavior has to be fairly bad for you to win at all. To win damages, the behavior usually must be shocking. After all, the money belonged to the person who died, and it was the deceased’s wish that the bank handle the money.

“There is not a level playing field when it comes to trust litigation,� acknowledges Howard Kipnis, partner at Hilding, Kipnis, Lyon & Kelly in San Diego. Kipnis, who represents numerous banks, notes that legal provisions forcing heirs to pay legal fees for both sides deter heirs from suing. But there have been a few cases where heirs have won and banks have been forced to dip into their own pockets to pay damages.

A few simple moves on the part of the benefactor when setting up the trust can head off the bulk of the problems. Solving problems after the benefactor’s death is far more difficult.

Lipe suggests, for example, that benefactors consider naming a co-trustee, who would share investment or distribution authority with the bank. If there’s no savvy friend or relative available to do the job for free, consider hiring an outside party.

Most contemporary trust agreements also include a removal clause, which allows heirs to change corporate trustees without going to court, Lipe says.

Smith thinks benefactors might also want to contractually set annual fees, so that banks won’t be able to hike their prices once the benefactor dies.

Finally, make sure a trusted friend or relative has a copy of the trust agreement to ensure the bank follows the stipulated rules.

Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. You can message [email protected] on the Internet.