Santa Barbara Trust and Estate Update�Who’s looking out for the Beneficiary?

The family office concept has been around for a while. It is generally set up to run the financial and legal affairs of a single high net worth family. Often overlooked in this process, however, is the issue of who is in place—if anyone-- to protect family members for whose benefit the office has been set up for in the first place—the beneficiaries of the estate or trust. Too often, the beneficiary is instructed that he or she has certain rights, but is given no clear guidance for how to exercise those rights.

Those charged with running a family office, and those charged with administering an estate, would be well advised to consider retaining an attorney for the sole purpose of representing and advocating on behalf of one or more beneficiaries.

Is this necessary? After all, in order to protect the rights of beneficiaries, the law provides them with ways to monitor the trust and the trustee. All too often, however, the beneficiary lacks either the understanding or the background sufficient to know what his rights are and how to best assert them. In such instances, a family office or institutional trustee who fails to retain counsel to properly advise the beneficiary may not be fully performing its legal duties.

Here as some common examples of the rights typically afforded a beneficiary and how a lawyer may be able to help ensure that the beneficiary’s interests are being fully protected.

Beneficiaries are Entitled to a Trust Report—But how do you read the Report?

Beneficiaries have the right to know how the trust is doing financially. Typically, trust reports are sent out annually by the trust. But what is the beneficiary supposed to do once he receives the report? Having counsel well versed in legal and financial reporting requirements can greatly assist the beneficiary in understanding what he is looking at. It’s not enough to see that the trust is making money or losing money. The beneficiary needs to understand why. A trust that is making money should perhaps be making more money. A trust that is losing money may very well have a perfectly appropriate reason for its performance. Not every good year is cause for celebration, and not every bad year is cause for distrust. Without proper grounding in financial basics, the beneficiary has no solid way to make that call.

Beneficiaries Have the Right to an Accounting—But should they ask for one?

Trustees generally decide how the principle of the trust will be used. Typically, trusts contain both real property (real estate) and money, giving the trustee discretion in how each asset is invested. The law generally requires that trustees act prudently with investments, diversifying so that all the assets of the trust are not in one place. If a beneficiary has questions or concerns about the trustee’s decisions for investments, he has the right to request an accounting of investments.

But how does a beneficiary know if his concerns are valid in the first place? If the beneficiary lacks the tools to advocate on his behalf, a lawyer should be in place to fill that role. This arrangement only serves to benefit the trustee, since the lawyer can help the beneficiary distinguish between credible and non-credible concerns, and perhaps eliminate the need for a costly and time consuming trust accounting that details every investment and its gains and losses.

Beneficiaries Can Request a New Trustee—But do they have a legal basis for doing so?

A beneficiary can request a new trustee if the trustee is being difficult, uncooperative, or refusing to do their job. This requires a legal filing and a ruling by the court. However, typically only extremely egregious actions will justify a change. Knowledgeable counsel can advise a beneficiary on whether a trustee’s conduct rises to a sufficient legal level that it justifies court intervention.

Again, while it may sound counter-intuitive, it is often in the trustee’s best interest to have competent counsel advising the beneficiary on such matters, so a potentially costly and time consuming court action can possibly be avoided at the outset. Paying for a few hours of a lawyer’s time advising the beneficiary on the front end is likely to eat into fewer trust proceeds than the cost of a full blown court action later on.

Beneficiaries Can Sue the Trustee—But should they?

If the trustee has acted in other than the best interest of the trust beneficiaries, the beneficiaries may sue the trustee. Before making this determination, however, the beneficiary needs to understand the trustee’s legal obligations and duties with respect to management of the trust. Is a loss of trust assets the result of an appropriate but underperforming investment, or rather the result of an inappropriate investment not suited for the particular circumstances? Is the trustee being fair and impartial to all of the beneficiaries or favoring one at the expense of others? It is often difficult for a beneficiary to make an objective decision on these questions without the assistance of a competent, neutral third party.

Having a qualified representative of the beneficiary take an objective look at these questions can promptly put any concerns to rest, or if there are legitimate concerns, can help facilitate what will likely be a far faster and more satisfying resolution than proceeding to court.

Retaining a lawyer to protect the beneficiary under any of these scenarios may seem at first to be an unnecessary expense. But for a family office and a trustee committed to fulfilling its legal obligations to the fullest, it will often be among the best money spent in the long run.