The global health pandemic is a crisis affecting the health and well-being of our citizens, and a financial crisis of unknowable breadth and duration. We are all in crisis to one degree or another and trustees of private trusts face conditions and decisions once unthinkable. Trustees will be called upon to make the most difficult decisions of their tenures, including investments, management of trust assets, cost measures and decisions about distributions to beneficiaries.
No one has a crystal ball. No one can make predictions or decisions based upon analytics or historical data. There is no precedent. One thing can probably be stated with some degree of certainty, however, is that the decisions trustees make during the pandemic will be criticized and challenged by beneficiaries, because outcomes will likely have to be evaluated based upon how they fared under extreme circumstances.
The following is intended to provide some helpful guidance for trustees.
- Communication. Trustees have a duty to keep beneficiaries reasonably informed concerning the status of the assets and liabilities and their actions. This is generally accomplished through accountings and account statements. But bear in mind that this is a psychological crisis as well and communication can ease stress, reduce misunderstandings, help build confidence in the decision-making process and generate goodwill all of which can reduce the likelihood of disputes later. Consider regular video conferencing to help to stay connected.
- Process, process, process. The most effective means of making decisions that can withstand scrutiny is to ensure that you have a well-conceived, well-documented process for decision-making. Courts should not sit as a “super-trustee” deciding whether the judicial officer adjudicating a breach of trust case, putting himself or herself in the shoes of the trustee, would have made a different decision. The proper analysis is not whether the decision in hindsight was the “correct” decision. Courts are supposed to evaluate the reasonableness of the manner in which the trustee arrived at the decision. A trustee who made a rational decision after proper due diligence and due consideration should not be found in derogation of duty even if a judge or a testifying expert would have made a different decision, or the decision turned out badly. The wider the net the trustee casts in soliciting input and information, and as appropriate, expert advice, before reaching a decision, the more defensible that decision will be should there be a challenge. Documenting the steps taken and analysis is critically important.
- Petitioning the court for instructions. In some circumstances, it can be useful to petition the court for instructions before taking a decision, which can then immunize the trustee from liability. Courts react differently to requests for instructions that are really aimed more at protecting the trustee from liability for what might be considered a business decision as opposed to an instruction, for example, that pertains to an ambiguity in the governing instrument. Some courts are reluctant to provide instructions in the former circumstance and others appreciate that it is an opportunity for persons to raise their objections before a decision is carried out. It is worth underscoring that decisions are to be evaluated based upon the information available at the time a decision is made, rather on the outcome, and thus instructions should not be denied on the theory that the court should refrain from immunizing a trustee from a decision that may turn out badly. The COVID-19 environment adds a much more difficult problem, however. Most courts are closed with the exception of (true) emergency applications, if not entirely. Whether a decision, and the need for court instruction, is truly an emergency is a high bar, and some courts have been hard on parties and attorneys for failing to respect the gravity of the current environment and scarcity of judicial resources.
- Notice of proposed action. Consideration should be given to whether an action contemplated by the trustees is one that qualifies for procedures available in some jurisdictions that permit a trustee to provide written notice of proposed action. The effect is the same as a court order instructing the trustee to take the action in the event there is no timely objection by a beneficiary. If the beneficiary objects, however, there is no protection absent seeking instruction from the court.
- Accountings. It is more important than ever during these difficult times to provide timely accountings both because information, even when it imparts bad news, is ultimately more conducive to alleviating stress and tension than no news or belated information, and because the statute of limitations on claims will begin to accrue. In some jurisdictions, the accountings can actually shorten the statute of limitations generally available by law if proper procedure is followed, and attention should be paid to whether that option exists in an individual case.
- Concentrated positions. Not uncommonly the trusts of high-net worth individuals contain concentrated positions in the portfolio generally consisting of the wealth creator’s business from which that wealth was generated or sacred cow types of investments. The trusts often waive the requirement of diversification to allow the trustees to hold concentrated positions and even absolve the trustees from liability for doing so. Absolution, however, is generally not absolute; hence, trustees may still be held liable for gross negligence, reckless indifference or willful misconduct. Unless the trust contains an absolute mandate against selling an asset (and arguably trustees might even be grossly negligent for not seeking relief from such a mandate), a waiver of diversification coupled with an immunity from negligent conduct should not be considered sufficient for the trustees to adhere to the trustor’s intent for such concentrated positions to be maintained. While in these market conditions even diversification may not hedge against market losses which are widespread, a concentrated position can be a recipe for disaster. Due consideration to making adjustments in the portfolio and serious attention to whether the trustor’s intent is reasonable to maintain in world no one could imagine is demanded.
- Conflicts. Conflicts are obviously always a concern in good times and bad. However, in light of the economic crisis due to the pandemic, the ability of trustees to respond to the crisis and also deal impartially with beneficiaries may become a challenge. For example, in the circumstances of a trust with current and future interests in income or principal, trustees may receive demands for distributions from current beneficiaries or feel compelled to respond to their urgent needs, which could eat away at principal as it declines due to adverse market conditions. Beneficiaries entitled to future income and/or principal may seek redress against trustees who do not carefully consider the long-term interests of future beneficiaries while responding to the more urgent needs of current beneficiaries. At the same time, beneficiaries entitled to current distributions may complain that the trustees’ reluctance caused substantial harm to those entitled to assistance now. There is typically no magic formula when trustees have discretion about making distributions to beneficiaries. Thus, process and communication are essential, with careful attention paid to the potential conflicting duties and conflicting interests involved in a particular trust. A process that demonstrates that the trustees evaluated the potential impacts and consequences of a range of decisions on the varied needs and rights of beneficiaries is the surest method to protect the trustees.
- Expenses. This is a time for re-evaluation of all trust expenses which will no doubt receive greater scrutiny in the days to come. This includes trustee fees. Courts may take a harder line in reviewing trustee compensation and it would behoove trustees to pay careful attention to market trends in this arena. Having said that, the need for active participation and the risks of liability to trustees are greater than ever, and those factors deserve acknowledgment in the form of appropriate compensation.
- Trigger clauses. Trustees should be aware of clauses in trusts that are triggered based upon events that once seemed improbable and may not have been intended for such circumstances. For example, though not commonly used in the U.S., some trusts contain “flight clauses” which, upon the occurrence of certain events, require the trustees to seek to move the jurisdiction of the trusts (to flee the jurisdiction). There may be other provisions that require the appointment of special trustees or trust protectors.
- Succession. Trusts should be reviewed to ensure that there is adequate succession planning in place. That is simply a reality at this juncture.
*This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship. Please contact your Sheppard Mullin attorney contact for additional information.*