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| Who Can You Trust? |
Sentinels or Swindlers?
Jan Alexander
11/01/2005
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Margaret Hunter watched her trust fund dwindle over 25 years, from $5.9
million when it came into her hands in 1972, to $2.3 million in the late 1990s.
Over the course of a generation, she and her daughter, Pamela Creighton,
implored their trust officers at Lincoln First Bank of Rochester, N.Y., to
change their investment strategy. The fiduciaries replied that they were
helpless to do so.
The trust grantor, Hunter’s grandfather Charles Dumont,
had been married to the daughter of one of Eastman Kodak’s original directors.
He specified in his will that the trust fund consist solely of Kodak stock
unless “there shall be some compelling reason” to change the strategy, other
than merely to diversify the portfolio. Hunter and her daughter understood this
proviso, but their faith in the trustees was sorely tested as the stock declined
in value over the years.
TOP VIEW
Those heirs vexed by indifferent or incompetent trustees have had few avenues of
recourse, until recently. Now, they are having more success in court against
those who abuse their trust—in both senses of the word. New state laws are
requiring trustees to adopt more sophisticated portfolio management techniques,
and others in the works may make it easier to replace trustees who fail to put
their clients’ interests ahead of their own. Two thousand heirs have joined a lobbying organization to push for passage of this legislation and for other
reforms that would make it easier to remove trustees who fail to justify their
clients’ faith. |
As the trust’s assets receded, the heiresses
demanded an in-house legal appraisal. Attorneys opined that the trust’s
“compelling reason” clause did offer a diversification option, yet the trust
officers clung to the Kodak shares. In 1998, Hunter and her daughter filed a
civil lawsuit in the Surrogate Court of Monroe County, N.Y., seeking damages of
$39 million for money their lawyers claimed the trust should have earned.
Although the bank finally began selling off the stock in 2001, three years later
the court ruled for the plaintiffs, awarding the estate approximately $21
million. Hunter, now 81 and living in Washington, D.C., has outlived all three
of her daughters, leaving her the only remaining heir to the Dumont trust. Upon
her death, the remaining assets will be divided among three charities.
As
Worth went to press in early September, Lincoln First Bank, now owned by
JPMorgan Chase, was presenting its appeal. The bank declined to comment on the
case while it is before the courts.
For all their myriad estate planning
advantages, trusts require heirs to put their faith in both the foresight of
benefactors and the competence of trustees. The latter must not only faithfully
fulfill the terms of the trust, but act in the best interests of the living
beneficiaries. Until recently, heirs have had limited recourse to counter
trustees who were incompetent, indifferent—or worse. Today a growing number are
winning battles to alter this balance of power and can point to examples like
the Dumont case as hopeful precedents for others who believe their trust, in
both senses, has been betrayed.
Successful legal challenges to trusts may
empower heirs who otherwise would not consider contesting the authority or the
investing wisdom of their trustees—which is a daunting prospect for financial
ingenues, given the expertise required to manage a large investment portfolio.
“I’ve seen heirs who might tend to be too trusting,” explains Charlotte Beyer,
the founder and chief executive of the Institute for Private Investors, an
educational and networking organization for affluent families. “That is either
out of a sense they are entitled to delegate the responsibility or a lack of
interest in investing.”
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