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The Beneficiaries’ Dilemma

Controlling the spiraling cost of wealth management

Walter Bunzl, philanthropic industrialist, died in 1988, in Georgia, having created several trusts for his family.  Twenty-five years later, his individual trustees brought a proceeding to settle their intermediate accounts for the years 2005 to 2013.  Walter’s 92-year-old widow, his daughter, his daughter-in-law and his granddaughter responded with a battery of claims including breach of trust, breach of fiduciary duties, removal of trustees, interlocutory and permanent injunctions, accounting violations of the Georgia RICO statute, theft, fraud, conspiracy, professional malpractice and negligence. 

More specifically, the Bunzl family members claim that, beginning in 2004, after the individual trustees removed SunTrust Bank, N.A. as administrative trustee, the individual trustees orchestrated a series of complex transactions designed to drain Bunzl trust assets to benefit the trustees, generate fees and commissions and increase control over the Bunzl family fortune, naming themselves to controlling positions in over 100 entities created to hold the Bunzl Trust assets.

Interim Relief

In the course of litigation, the Bunzl family members moved for an immediate Interlocutory injunction to: 1) enjoin the trustees from transferring trust assets for their personal benefit, 2) remove the trustees and appoint temporary successor trustees, 3) compel the trustees to provide all documentation concerning the trust assets and their administration, and 4) freeze the personal assets of the trustees.

In June 2013, Judge Westmoreland, of the Superior Court of Fulton County, granted and denied the motion in part.  His order is an object lesson in the course that trust litigation may pursue.  Judge Westmoreland, inter alia: 1) appointed as Receiver Synovus Trust Company, N.A., to investigate and render an accounting of the Bunzl Trust assets from 2005 to the present, 2) required the trustees and the Bunzls to cooperate with and provide documents to the Receiver, 3) authorized the Receiver to retain professionals to assist it, 4) restrained the trustees from selling or disposing of real estate or securities and from compensating themselves, except on notice to the Receiver and the Bunzls, and 5) authorized the Receiver’s reasonable fees and expenses to be paid monthly.

Almost two years later, the Receiver filed its reports with the court in February of 2015, under seal.  The Bunzl family characterized the reports as “shocking,” and proceeded to expand the litigation, bringing a malpractice claim against a law firm with which one of the trustees had an of counsel relationship. 

Increased Burdens 

Effectively, the litigation has tripled the burden of administering Bunzl family wealth.  Under the usual principles that apply to the administration of trusts, individual trustees are entitled to compensation and to have their expenses paid, including the cost of the accounting and their legal fees.  And the Bunzls have been required to hire legal counsel, as well as other related professionals to support their litigation efforts. The court appointed the Receiver to investigate and prepare accountings, authorizing it to hire other professionals and to be paid monthly.  The trustees, the Bunzls and the Receiver have three sets of lawyers and related professionals working.  Almost two years later, with no resolution of the parties’ original claims, new claims are being brought, including professional malpractice, involving yet another party.

At this time, the court hasn’t rendered judgment on the allegations presented for consideration, and the available public record doesn’t permit reasonable surmises about what actually occurred.  Perhaps the litigation is needed to end abusive conduct; or, maybe differences have arisen from a failure to create reasonable expectations and communicate results effectively. Depending upon the actual facts, the Bunzls may have little choice in how to proceed. 

Appropriate and Reasonable Costs

Nonetheless, a central gravamen of the family’s complaints is the costs of administering their wealth.  And, the cost of wealth management is a central feature of the Prudent Investor Rule.  Section 7 of the Uniform Prudent Investor Act (UPIA) provides: “In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.”  The commentary on UPIA Section 7 proceeds to observe more succinctly: “Wasting beneficiaries' money is imprudent.”

When the Bunzl’s circumstances are considered in the context of the UPIA, they present the following dilemma.  Is it better to endure the burdens, costs and expenses imposed on the wealth by the individual trustees through their administrative practices, as unsavory as they may be?  Or, is the cost of litigation, tripling the administrative burden in the short term, necessary to end abusive behavior?  The Bunzl’s quandary is heightened by the current economic environment, suppressing the returns provided to investors, causing the wealth to have less ability to support administrative burdens. 

Checks and Balances 

Understanding that this unhappy dilemma may arise for any family, the further question begs to be asked: How to provide more choices for trust beneficiaries?  Knowing the burdens of litigation so effectively illustrated by the Bunzl trusts, is it reasonable to provide beneficiaries with only that option as a remedy?  Or should trust and estate practitioners be providing more effective tools for removal and replacement of trustees as a matter of checks and balances? 

The need for checks and balances in any matter of governance is well known.  As James Madison wrote in the Federalist Papers, No. 51, “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. . . . but experience has taught mankind the necessity of auxiliary precautions.”  These concerns apply no less to the governance of wealth held in trusts.  The likelihood that Bunzl family member would describe their trustees as angels appear minimal.

Remove and Replace

Powers to remove and replace trustees, sanctioned for estate and gift tax purposes since the issuance of Revenue Ruling 95-58, provide a cost effective option to litigation.  In appropriate cases, beneficiaries can be given the power to remove and replace trustees, subject to the limitation that the successor trustee may not be related or subordinate to the beneficiary within the meaning of Internal Revenue Code Section 672(c).  Alternatively, the governing document, preferably a trust agreement, may give the remove and replace power to a third party, a protector, who can serve as a referee between the trustees and the beneficiaries, supervising administrative practices as necessary to avoid disputes, and changing trustees when differences become irreconcilable.  The use of protectors as an alternative dispute resolution device is increasing, with several states having enacted protector statutes, and the Uniform Law Commission initiating a project to develop a Uniform Trust Protector Act. 

The power to readily remove and replace a trustee without litigation can only increase trustee incentive to serve the interests of the persons holding the power.  The Bunzl trust litigation provides one more example why such powers are needed to protect wealth for trust beneficiaries.

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