With collapse of financial institutions, should trusted adviser become trustee?

Trusts & Estates Special Feature, Massachussetts Lawyers Weekly, November 10, 2008

By Patricia M. Annino, George Burns and Thomas D. Davidow

It seems that every day another major financial institution crashes with little warning to the public, high-net-worth family or business owner.

In many cases, the relationship between that financial institution and the family has been in place for decades.

Businesses and individuals have been lent money by the financial institution, which has served as trustee and provided wealth counsel.

With the shifting of positions within financial institutions and the financial institutions shifting themselves, the key relationship officers may be gone. There is no certainty of what the future holds, yet the family needs, in spite of this uncertainty, to make decisions as to how its wealth will be handled and who should take on the trustee/fiduciary role at death.

With so much shifting sand in the financial services marketplace, that key family member may now rethink whether the trusted family adviser — the lawyer, accountant or CFO — should now be the trustee.

After sharing business and family issues for decades, as well as a common perspective, it is natural for a trusted adviser and his client to develop a personal relationship that extends beyond their professional one. It is understandable, in that case, for the client to name his trusted adviser in his estate plan as his trustee. The client wants the trustee to guard a whole host of goals and dreams that go beyond the preservation of the assets and wealth.

The client/donor believes that his trusted adviser understands him; that he has the wisdom to incorporate the donor's most important values, spoken and unspoken.

However, the dual responsibility of the adviser/trustee can blur the parameters of those roles and may have legal, financial and psychological ramifications. Indeed, the hybrid nature of the adviser/trustee's role offers both advantages and disadvantages, risks and opportunities.

When the client becomes disabled or dies, the adviser serves as a trustee with fiduciary responsibilities to the trust and its beneficiaries. Even though the trusted adviser/trustee should give credence to the founder's intent, the trusted adviser must switch his duty and loyalty from the founder to the trust, where the standard for decision-making is significantly different from that of the trusted adviser.

The founder can do anything he wants with his own assets, business and money. He can take risks. If his net worth or income declines, it is his responsibility, and he deals with the consequences.

When the trusted adviser takes over, the problems exacerbate. As a fiduciary, the trusted adviser cannot take that same level of risk, since it is not his money, assets or income. As trustee, he is obligated to preserve it for the beneficiaries. He therefore cannot act in the same role as the founder, or even in the same role he had as the trusted adviser to the founder.

If you sincerely believe you can make the greatest contribution by assuming the dual role of adviser and trustee, then take it on; otherwise do not. There are other ways to contribute.

For example, the founder may not be oper-ating his business strictly with a standard of profitability. He may be making business decisions for other reasons. He may be employing friends, keeping on older employees who are no longer productive but who were loyal to him during his lifetime, or running a division of the company because he has fun with it, regardless of the economic consequences of that decision.

The problem is intensified if one of those non-productive employees is a family member who may also become a beneficiary of the trust. When the trusted adviser takes over, he cannot maintain those decisions or take those same risks.

The combination of dealing with the disability or death of a friend and significant client, switching roles, understanding the risks and navigating the family issues is a Molotov cocktail — and where the trouble begins.

It's not necessarily a bad idea; however, the trusted adviser/trustee, or any trustee who is handling the wealth that is not his own family's, will have to deal with whatever heartache his friend/donor left behind.

It can be gratifying work to earn fees while helping families in a significant way. The problem arises when one has to deal with a set of circumstances that might impact die family and succeeding generations.

Transference and counter-transference

As a fiduciary, you have the authority of your professional expertise and you have power. While the authority of your professional expertise can have a salutary effect on the individual and the system, the authority of power re-creates transference — the original power and control struggles that parents and children face in one form or another all their lives.

It also re-creates or stimulates the fiduciary's own issues. When that transference/counter- transference is positive, it works well for all concerned. When there is a negative transference (family members complaining about the adviser/trustee to each other) or negative counter-transference (the adviser cannot stand one or more of the family members), the adviser is in the muck.

While it is important that your relationship with the donor/founder be respected and that your influence be real, it is equally important to have a structure that will balance your authority as trustee/fiduciary Otherwise, the consequences of the psychological dynamics of transference/counter- transference wffl impact everybody in the system.

What to do

1. If you are a trusted adviser, seriously consider whether you want to take on the "mess." The family may be better served by a dispassionate third party, leaving you to continue in your role as trusted adviser and to maintain your authority as wise counsel, a role in which you might best serve the family. If you sincerely believe you can make the greatest contribution by assuming the dual role of adviser and trustee, then take it on; otherwise do not; There are other ways to contribute.

2. it you do decide to take on the role of trustee, make sure that everybody in the family knows it and can give at least tacit approval.

3. Develop a resource with whom you can discuss the many dilemmas you face. Get your own trusted adviser. Remember, though, that one factor that may have led to your considering assuming your dual role is the savings in adviser fees that might be achieved. That advantage diminishes the more reliance you place on your own advisers.

4. Understand that you will never figure it out by yourself. Given the principle of transference/counter-transference, it is very easy to get lost in the dynamics. It is important that you choose another professional with whom you can sort out your thoughts and ideas.

5. Consider serving as a co-trustee, rather than a sole trustee. Partnering with a financial institution that serves as a professional trustee can be an important buffer with tremendous resources. Established trust services with decades of experience have dealt with any issue you may face many times before and will be less burdened by the emotional connection you have to your founder.

6. If you decide to take on the role, review the legal documents before you agree to serve in that capacity to be sure you understand the scope of your responsibilities, are comfortable with the investment and business risks that are associated with the trust assets, have the right to resign, determine who would appoint a successor in your stead, the grounds by which you may be removed as trustee, how you will be compensated, the language by which you will be liable for your actions or inactions, and the right to seek reimbursement from the trust for your legal fees and expenses. Remember in particular to check your insurance and indemnification arrangements. A lawyer-trustee, for example, presents a mixed professional role to his or her insurer; do not assume that a lawyer's errors and omissions policy covers trustee functions.

7. If the estate plan includes "riskier assets," such as a closely held business, encourage the founder to understand that, after his death or disability, the fiduciary has risk in operating the business that the founder did not have. Make sure that the founder's intent is clearly stated in the document, and the risks associated with serving as trustee are covered in the document. If, for example, the founder wishes the trustee to hold the business as a trust asset, the document should not only state that, but also state (assuming it is the founder's intent) that he understands the risks associated with that decision, and the trustee is authorized to maintain it even if it is not a productive asset, or declines in value or does not produce income. It can also be helpful to have the founder's intent expressed in an outside "Mission Statement" that the trustee can use as guidance and can show to beneficiaries who may put pressure on the trustee to change the direction of the trust (for example, to force the sale of a business or to lay off key employees).

At its best, the advisor/trustee role is greater than the sum of its parts. Your ultimate decision will turn on a combination of intellectual analysis and simple emotional response, Your head may tell you that there's danger and confusion ahead, but your heart may say that you are the best person to chart the future course of the founder's family and business.

Patricia M. Annino chairs the estate planning practice at Prince, Lobel, Glovsky & Tye in Boston. George Burns is a shareholder with the Maine law firm of Bernstein Shur, where he is a litigator. Thomas D. Davidow, principal and founder of Thomas D. Davidow & Associates, has spent 25 years addressing psychological and family issues that can interfere with sound business decisions.