That's the billion-dollar question. Or should we say, the trillion-dollar question.
There is nothing worse than having to say goodbye to an elderly parent: with the aging population, that's happening more frequently. And it falls to the children of those who have died or who are nearing the end of their lives, to sort out the estate and arrange for proper succession. This is quite correctly done in concert with a lawyer, and with the involvement of a bank or trust company that will gladly serve as trustee on your behalf in an effort to manage, and grow the assets of the estate according to your stated wishes.
Here's the problem. A bank is a trustee. But a bank is a business, too—a business always lusting for new sources of revenue to grow its holdings and offset losses incurred elsewhere. Just recall the recent losses at the heels of the credit crisis, and the subprime mortgage meltdown, and you'll understand the pining for revenue. Earlier this month Wachovia suffered a quarterly loss of $8.8 billion over a three-month period.
Banks know that over the next few decades there were will be new money coming their way, together with the opportunity to manage that money as a trustee. The question is, in just whose best interest will that money be managed?
It's supposed to be you, given that trustees have a fiduciary duty to manage the assets of the portfolio in the best interests of the estate. If there are investments to be made, it is in the best interests of the estate that the funds are invested in entities that are reasonably safe, provide for a good return, and allow for the opportunity to mitigate or minimize fees.
However, a bank is a business, with its own family of mutual funds and products from which it makes a profit. That stated, is it appropriate for a bank to invest the assets of an estate into its own family of mutual funds and investment products from which it earns fees? Not if there are alternative investments that are sound, safe, more lucrative and less expensive to obtain and carry. If such a premiere, and well-performing investment happens to be at a competing bank, there should be no qualms about making the investment given that it is in the best interests of the estate, and the client.
In fact, the bank as trustee has a fiduciary duty to do just that.
But don't bet on it.
Lorene Grant (not her real name) told lawyersandsettlements.com last year that in her opinion, Bank of America was not acting in her best interests, or the interests of her late father's estate. The latter left $1.5 million to be managed, and Grant's attorney duly set up the trust according to recommendations made by a Bank of American financial planner.
But here's where it gets interesting. Bank of America charges a fee for managing the estate, and serving as the trustee. That's fair. But Bank of America also earns income from another source: the investment of estate assets into funds under Columbia Management Group, which is the Bank of America's in-house investment arm. Not only is the bank investing Lorene and her brother's trust assets in Columbia funds when it may not be fiduciary prudent to do so, but according to Grant "they get maintenance payments from Columbia's funds and the maintenance from us as the trust, as well. So they're double dipping. Their people pay them and we pay them; they're actually getting more out of it than we are."
Grant also groused to writer Paul Halpern last December that her 3.1 percent annual earnings from total estate assets is nice to have, but that an annual check is not the most appropriate strategy for her, in Grant's view. Given her age in the mid-sixties, she says, "if they were looking at my financial situation, they would be working on making
me debt-free, because the trust is not part of my estate…
"I would gladly take less interest income if I was debt-free. Now everything I receive goes to pay bills, the mortgage, student loans—it isn't working for me."
By keeping the estate intact, the bank has more capital to play with, and allegedly earns a higher fee from investing the assets.
A trustee can be changed under the Uniform Trust Code, which is now law in several States and makes it much easier for trust beneficiaries to switch trustees. This is especially important if a beneficiary feels as if the current trustee is not acting in good faith, with the best interests of the trust ahead of its own—or simply for reasons of economics. A beneficiary may have found a trustee that would charge lower fees, and would invest the trust without bias.
Sometimes a beneficiary wants to move a trust away from a large, faceless institution to a smaller entity with people they know, and trust.
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Perhaps even more so. Remember that it is a trustee's fiduciary duty to act in the best interests of the estate. If they aren't, that's a breach and is actionable. But before it gets to that point, know your rights and know what is going on with the estate assets. If you don't agree with something, speak up. Let them know you're paying attention.
If you feel a change is in order, consult a qualified estate and family trust lawyer who will guide you through the process, and help you get a fairer deal for the assets your loved one worked a lifetime to earn…