Preventing Estate Litigation By James R. Robinson
Perhaps no civil litigation apart from divorce can cause more emotional damage than a family dispute over an estate or trust. Such disputes typically involve sibling rivalries and other deep-seated family conflicts, with issues involving great wealth thrown into the mix.
Consider just a few of the high-profile trust and estate disputes over the past decade:
In 2002, Liesel Pritzker brought suit against her father and 11 cousins, alleging they had "looted" $1 billion from trusts established for her and her brother. The suit settled four years later and resulted in the dispersion of an estimated $15 billion in concentrated family wealth.
Albert Hill III, great-grandson of H.L. Hunt, brought suit against his uncle, Tom Hunt, in his capacity as trustee of the trust for Hill's benefit. The suit, which settled in May 2010, alleged that the trustee and others (including Hill's father, Albert Hill Jr.) misled the beneficiaries about the value of the trust assets and engaged in various acts of self-dealing.
Apart from these prominent family feuds, several challenges to trustees' management of investments, particularly concentrated stock positions, have caught the attention of, and caused alarm in, the fiduciary services world.
It all points to the fact that trust administration can be the source of significant conflict, particularly in the family context. The principal causes of discord are lack of trust and communication between trustees and beneficiaries, and a divergence of interest and opinion among the generations. In the corporate context, financial issues, particularly diversification of investments, predominate.
Many difficulties could be avoided by two things: first, more careful document drafting that considers the likelihood of changing circumstances and makes the trust settlor's intent clear, and second, more communication by the trustee with the beneficiaries. Communication is also vital when there are either multiple trustees or, as in the case of a corporate trustee, multiple people assigned to different administration functions.
Aside from family strife, what follows are some of the other common causes of conflict in the area of trusts and estates:
Management - A lack of management or oversight of investments can be a significant source of controversy and liability. Many investment issues can be addressed at the outset through careful drafting, but trust investments still typically require active management by the trustee.
One particular investment issue that has surfaced in recent cases is that of a corporate trustee that holds either its own stock or stock in a company with which it has a significant banking relationship. When that stock declines in value, or does not perform to expectations, or the trustee otherwise retains more than might be considered prudent under modern investment principles, it could expose trustees to allegations of conflict of interest.
Distributions - As most trustees are painfully aware, distributions are often a continual source of discontent. Even in a mandatory income trust, what constitutes "income" of the trust can be a difficult issue to resolve, and different sets of beneficiaries may be unhappy regardless of what decision the trustee makes. This can be exacerbated when distributions of either income or principal are subject to a standard, such as "support and health," and the trustee cannot get enough information from the beneficiary to make a sound decision.
Communication - Lack of communication between fiduciaries and their beneficiaries can contribute greatly to a climate of mistrust and suspicion. Although a fiduciary may be restricted in what it can disclose, an uncommunicative fiduciary generally exposes itself to charges that it has breached its duty of disclosure. This may lead to an investigation of what other misconduct it may have sought to conceal by its silence.
Avoiding Controversy
Many issues can be avoided by making sure estate plan documents are carefully drafted. Consider, for example, the seemingly contradictory language in the will at issue in a famous legal case known as the Matter of Dumont, which centered on a trust created after the death of Charles Dumont in 1956. After noting that the bulk of his estate would likely consist of one stock-Eastman Kodak Company-the will stated that the stock could not be disposed of "for the purpose of diversification."
Yet later on, the will also stated that the stock could be sold for other "compelling" reasons.
The corporate trustee presided over the trust as the Kodak stock it held plummeted in value. When it was sued as a result, the trustee argued that it was permitted to hold the Kodak stock based on the will's first paragraph mention of diversification. However, the trial court held that the first paragraph, particularly in light of the second, did not excuse the trustee from its duty to manage the trust investments prudently, and that a precipitous decline in value constituted a "compelling reason" for selling.
Much of the blame, however, should be laid at the feet of the drafter of the Dumont will, who was unclear about the authority of the trustee to manage the investments of the trust and, more importantly, unclear about the testator's intent. For example, what did the trust's creator consider a "compelling reason"? For that matter, what fiduciary sells an asset "for the purpose of diversification of investment"? Diversification is not an end in itself, but a means for an investor to mitigate risk in a portfolio.
Of course, the drafter cannot anticipate every eventuality. Circumstances are likely to change in ways that are difficult, if not impossible, to foresee, particularly with long-term trusts. However, that is precisely the point: The drafter should draft precisely, but flexibly, for the certainty of an uncertain future. This can be accomplished by:
Avoiding vague phrases such as "for purposes of diversification of investment," employing instead an authorization for the trustee to retain assets as long as the trustee determines that doing so is in the best interests of the beneficiaries and consistent with the trustee's duty to manage the investments prudently.
Clearly stating under what circumstances the trustee is authorized to retain or sell the trust's business interests. If the settlor or testator has a particularly strong desire that a business remain owned by the family or otherwise closely held, make that clear-as well as the circumstances under which the trustee can disregard those wishes for the sake of the trust.
Incorporating broad powers and specifying in detail what information may or must be provided to which beneficiaries, under what circumstances and how often.
Addressing potential conflicts of interest-for example, a trustee owning its own stock. One possible solution would be for an independent trustee to approve such holdings.
Precisely stating examples of what qualifies for distribution under a given standard.
When controversy is foreseeable, many attorneys suggest the use of an "in terrorem" or "no contest" clause in a will or trust. These clauses typically revoke or cancel a disposition to any beneficiary who brings an action to contest a will or trust or otherwise interfere with its execution. These provisions are enforceable in nearly all states, although courts, being understandably cautious about eliminating the rights of beneficiaries, will often construe their application quite narrowly. Moreover, clients may want to think twice about making terms of the trust too oppressive, as this will likely exacerbate tension between the beneficiaries and the fiduciaries.
A more positive method of discouraging lawsuits against fiduciaries is to include a higher-or perhaps one could say lower-standard of liability. Most states permit a settlor or testator to exonerate a fiduciary for anything except intentional misconduct or bad faith. More typically, a will or trust may hold an executor or trustee liable only for those types of conduct, along with gross negligence. The estate or trust may indemnify the fiduciary and provide for payment of the fiduciary's legal fees-contingent upon repayment if the fiduciary is ultimately held to be liable under the relevant standard of conduct. Provisions such as these discourage lawsuits because they are designed to make suits against the trustee much more difficult to win. Of course, it should be noted that meritorious suits with valid claims might be stymied under such a provision.
Finally, the drafter should strongly consider using language regarding the trust creator's intent beyond the strictly legal. This can be an excellent opportunity for them to explain, in plain language, what they intend, and perhaps what they hope their values and legacy are understood to be. This can be of help, not only to the trustee in carrying out the terms of the trust, but also to the beneficiaries in understanding the reasons behind the decisions made.James R. Robinson is a partner with the law firm of Schiff Hardin LLP in Atlanta, focusing on the wealth transfer and business succession planning needs of families and closely held businesses.