Ask the Probate Judge—Trustee Caveats
Rudd, appeared January 4, 2007, Albuquerque Journal, Business Outlook
Reprinted with permission
Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.
I hesitate to start the new year with a "real life horror story" about malfeasant trustees, but this reader's letter is so thought-provoking that I want to share it.
The reader wrote, "I read your excellent, concise summary about trustee disclosures and duties in the Journal. For the last six years I have shared a co-trusteeship with my brother and sister in a trust left by my mother in another state. Real estate partnerships are the primary assets. My siblings and I inherited the income; our children will own the property after our deaths. In the real world, this has proved disastrous because:
- Few of these family trusts run by family members are ever questioned by the trustees who do not control the information. The natural inclination of the trustee who operates "the business" is to keep everything secret and to resist disclosure. It takes a lot of fortitude to question a family member who tells you that you are "distrustful."
- It is extremely expensive for one trustee to hire an attorney to challenge the misconduct or failure to disclose by the trustee in control. Even in a large city it is difficult to find an attorney who really understands how to apply the law and get results. Because of the astronomical costs and legal fees, a lawsuit must be the last resort.
- It is impractical to count on the court to award legal fees and costs to the challenging trustee because litigation must proceed in earnest or conclude to get such a ruling.
- The children/beneficiaries of the principal are not wealthy enough or otherwise inclined to take on their uncles/aunts over their failure to report or to account for cash realized from the sale of real estate. The beneficiaries don't understand their rights. The worst part is that various family members are estranged from one another due to this dispute.
- There is potential liability for all co-trustees. All trustees can be held liable by beneficiaries for misdeeds of one of the trustees, even if the other trustees did not know about the misdeeds. Then the innocent trustees must figure out how to collect from the wrongdoers. [Judge Rudd comments, 'In New Mexico a trustee who does not join in an action of another trustee is not liable for the action. However, each trustee has the duty to exercise reasonable care to prevent a co-trustee from committing a serious breach of trust and to compel redress of a breach. The issues raised could certainly generate protracted litigation regarding who is at fault and who knew what when.']
Given my experience, I think it is a terrible idea for a parent to leave his/her property tied up in a trust that owns real estate or an on-going business. This is a recipe for a dispute among the heirs/children/grandchildren. A strong controlling state statute is not enough.
The trust instrument should provide for sale and division of the assets as soon as this can be done responsibly and practically. The trust instrument should also expressly demand that the trustee in actual control of the assets: 1) make full on-going disclosures to the other co-trustees quarterly and the beneficiaries annually; 2) act only with the express approval of the other co-trustees; 3) not be permitted to vote on her own salary from the trust or the partnerships; and, 4) pay the reasonable legal fees of the co-trustees or beneficiaries who raise legitimate questions.
I'm sure you've heard these problems before, but I wanted to pass along my experience. Anguished Reader"
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Judge Rudd's recommendation to those who contemplate creating a trust in the new year and beyond is to ask yourselves: Would a bonded corporate fiduciary be a wiser choice than a family member to serve as my trustee? And if I place my property in a prolonged trust arrangement, will I be creating more problems than I'm solving?
Of course, to be fair, if readers have had good or bad experiences with corporate trustees or good experiences with family trustees, I would like to hear your stories.
© 2007, Merri Rudd & Albuquerque Journal, All Rights Reserved