Trust, Are You Kidding?!
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Sue wants to change the system to be responsive to the goals of the grantor. Her intention is to educate people about how they can choose a model of trust that works with their family and assets.

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Too many err when providing for heirs

San Francisco Chronicle
George Raine, Chronicle Staff Writer

Over the next 50 years, it's expected that $45 trillion will be transferred to heirs and charities via estates - the largest wealth transfer in history.

How much of it is siphoned by trustees or lost to estate taxes, administrative fees, lawyers' fees, appraiser fees, accountants' fees or poor investment acumen surely will be a record, as well.

Estate planning, in particular trusts and their administration by financial institutions, can be mind-numbingly complex. Talk of them turns on the unpleasant subject of death. But unless consumers remain vigilant - and technology is employed for checks and balances - assets will continue to be lost in an industry largely unchanged for centuries and ever ripe for litigation.

"It's not a trustworthy system," says Barbara Suzanne "Sue" Farley, who has practiced law in the Bay Area for more than 30 years, specializing in litigation surrounding trusts and estates.

Farley says that nebulous and wide-open terminology in these documents - such as provisions for "health, education and welfare" - can lead to distortion of intentions. As she puts it, these are words "you could drive a truck through."

Warring and dysfunctional families and, often, veils of secrecy around family wealth also may be responsible for the lack of progress toward making the trust system more efficient and effective, said Farley.

People need to "be more vigilant about how they set up their estate, how they structure the way their money goes to their children and the supervision of their family and to assume you must be ever vigilant in oversight of your trustee, because if you are not it is very likely that your money will be diminished or dissipated entirely," said Farley.

Farley describes steps consumers can take to "disaster-proofing" estate plans and offers suggestions for avoiding messy family money conflicts, as well as a host of tips for holding on to wealth.

For several years, Farley, of Piedmont, and software developer Ernest Freeman of Oakland have worked together on software and the architecture of an enterprise system that financial institutions could employ in administering trusts, as well as a template for consumers who could be precise about how assets are to be distributed. She has written a book for consumers on the topic, "Trust, Are You Kidding?" to be published by Morgan James Publishing in New York.

"You link the trust to an automated process that is accountable and reviewable and accessible by the beneficiary," Farley said of the technology she and her collaborator have developed. "I think you can eliminate about 80 percent of the decision-making up front," she added, by neutralizing trustees already in a thankless position - or in a position to mismanage assets.

Performance standards

Information would be assembled in the trusts so that would automatically measure performance by trustees against standards that grantors establish, and red flags would be raised early so fixes can be made by the banks, under Farley's proposal.

For example, the technology could monitor whether a standard of performance is being met - say a profit of 4 percent on investments. It could also sound alarms when conflicts of interest that Farley says she has commonly encountered are discovered - for example, financial institutions investing in their own instruments for a trust.

The plan reduces risk and the prospect of litigation, Farley and Freeman argue, by a technological fix. Just as Autodesk software shelved drafting tasks for architects, technology can transform the trust industry, said Freeman, who has experience building software products from reference books.

But the banks are not interested.

Over several years, Farley and Freeman have made presentations to six major banks with a Bay Area presence. All have been interested but have stopped short of buying the product.

"One of the problems is financial institutions recognize that the system is broken, but they don't know how to fix it," Farley said. "And because they don't know how to fix it, alerting people to the fact it is broken doesn't do any good."

She said that one banker told her, "Litigation is the cost of doing business."

"I think the intransigence of actually moving in this direction stems from not being willing to spend the money to solve the problem," said Farley.

Farley is putting her faith in a first customer - perhaps an institution getting into the trust business.

A spokeswoman for the California Bankers Association did not return a call and an e-mail seeking a response.

Matters will only worsen with the cascading wealth of coming years, she said. According to the Boston College Center on Wealth and Philanthropy (formerly the Social Welfare Research Institute) in Chestnut Hill, Mass., from $41 trillion to $45 trillion in inheritance will be distributed before 2052, $6 trillion of it to charity.

"That may be a conservative number," said Robert Kenny, the center's associate director. It is money Baby Boomers are inheriting, creating and leaving, he said. "A lot more coordination needs to happen for this money, but my sense is people are getting it. It's such a big number you've got to pay attention."

What trusts accomplish

Trusts are legal documents that give control of grantors' property to a trustee. The trustee holds title to the assets and operates in the place of the grantor for the benefit of the trust's beneficiaries. Trusts are increasingly popular because they're intended to avoid probate.

Farley says that while trusts were once solely for the wealthy, more people may find them useful because of asset appreciation.

Today, financial institutions manage $1.1 trillion in trusts, Farley says.

In 1984, Farley represented heirs of the Gump's store fortune, who alleged in a suit in San Francisco Superior Court that Wells Fargo Bank had mishandled their trust. After a trial without a jury, Judge Frank Shaw found the bank guilty of fraud and ordered it to pay $1 million in punitive damages.

He ruled the bank's officers had engaged in "outrageous conduct" in administering the trust and had engaged in "malicious and oppressive" behavior by threatening heiress Antoinette Gump with additional fees if she kept asking the bank questions about the handling of her money.

The ruling was partially reversed by an appellate court, but the fraud claim was not overturned, Farley said. A spokesman for the bank, Chris Hammond, said Wells had no other comment on the case.

But after the 1984 lower court ruling, news of it spread and other cases came forward. Farley said she had taken the Gump case believing it was simply bad blood between two parties, but found much more, and in the 23 years since she said she has seen the same problems with trusts and estates repeating themselves.

"I had stumbled into an arena where control over wealth and power over families sometimes meant mismanagement, abuse, lack of accountability, frustration and loss of assets for those caught up in the web of trusts and estates," Farley writes. She described the Gump case as "the tip of an iceberg," and said that, in the trusts she has been involved with as a lawyer, from 5 to 20 percent of their value was consumed by taxes, fees, poor judgment and more failures.

Avoiding disaster

But disaster can be avoided, she argues. Her five steps to disaster-proofing an estate plan are:

  • Communicate with your heirs about the details of a trust or will, "as unpleasant as that may be," because it may change your thinking about the terms.

  • Ensure there is accountability in a trust, which means an accounting and written report is required of a fiduciary annually.

  • Do not grant broad authority to your trustee. "We absolutely abdicate all control and authority over our families to trustees, and that is an invitation for abuse," said Farley.

  • Establish a standard of performance for investments for a trustee to meet.

  • Empower your beneficiaries. "That means that the people who are affected by the instrument you have created should be given the authority and power to get rid of a bad trustee," she said.

A sixth might be to update an estate plan every three years, she said.

"Our jobs, relationships, assets and family have a way of evolving to different stages, often in a way we have not anticipated," said Farley. "For those reasons, the estate plan should not be stagnant but a living financial tool for out families."

Farley's five steps to disaster-proof your estate plan

  • Communicate with your heirs about the details of a trust or will.

  • Ensure there is accountability in a trust, which means an accounting and written report is required of a fiduciary annually.

  • Do not grant broad authority to your trustee.

  • Establish a standard of performance for investments for a trustee to meet.

  • Empower your beneficiaries.

Source: Sue Farley


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