Arranging to leave a trust for your heirs with your bank? Consider the following story…
by Leslie Eckford
Many decades ago, a doctor and his wife, after having a successful practice and a comfortable lifestyle, set up a trust account to leave funds for their 4 children. In the early 1960’s, they went in to visit their local bank, met with the trust officer and created a trust fund with mostly blue chip stocks that was to be shared equally by all 4 children. After they passed away, the funds prospered. The local bank was bought out by a larger state bank, and then again the next bigger bank and so on. Over time, the locally owned bank that the doctor and his wife had started with changed names 5 or 6 times and became a series of bigger and bigger national corporate entities.
The four children were now adults and raising families of their own. Most were managing well financially and found that they did not need to consider delving into the funds set aside for them by their deceased parents. They received the dividends and decided that the trust funds could then be passed on to their own children. Now they aged and the grandchildren of the original trust became adults.
After the first of the doctor and his wife’s children died at the age of 79, her heirs set about to obtain and distribute their shares of the trust. There was no longer a friendly trust officer at the local branch of the bank to confer with. Now the adult grandchildren were forced to deal with a national wealth management office of a large corporate bank in another state. To their surprise, they were told that in order to distribute their share, they would have to sign an agreement with an indemnification clause. The clause specified that if any of the remaining heirs disagreed with the management of the funds or sued the bank, all the heirs of the fund would be liable to pay any fees the bank incurred.
As they were the first of the heirs of the trust to process a distribution, this gave them pause. They could just sign the agreement as they had no issues with the trustee or how the funds had been managed. But, they knew of a younger cousin who, as an only child, had been given a great deal of money by his parents in his early twenties to start a business. Instead of investing the money in a business, the young cousin developed a habit of gambling and there were stories of wild weekends in Las Vegas and disappearing cash. The young cousin grew into a not very happy middle-aged adult, and rumor had it that he frequently hit up his parents for more money to bailout debts, settle a divorce and buy a sports car that he could not afford.
Would this relative with spendthrift habits decide to sue the bank? Would he claim that the money in the trust had been mismanaged by the bank? The bank put in the indemnification clause to protect the bank’s interests. But, in light of the grandparents’ intent with the trust, should the other heirs be liable?
When a Gift Becomes a Headache
This brings us to what the purpose of a trust is for most people. It’s clear from this example that the original parents who created the trust set it up to do one thing: be of financial benefit to their progeny. The indemnification clause is a new addition to the distribution of funds to beneficiaries. Does the bank have the right to change the terms of the original trust? What about their duty to distribute the funds?
It has become customary for the corporate trustee industry to present a settlement agreement to beneficiaries. These “proposed” agreements may include several items. Commonly, they will have a release (asking the beneficiary to agree to say “I will not personally sue or file claim against the bank”). They may also have an indemnity clause (“I will reimburse the bank for any costs it incurs if others sue or file claim”). The bank may refuse to distribute the appropriate funds until these “proposed” agreements are signed. These increasingly broad agreements may go beyond what is legal in a particular state.
While not all banks are requiring this signed agreement before distributing funds, it complicates an already fraught time for the beneficiaries. The possibility of legally challenging a powerful corporation is intimidating and expensive. When in this position, the beneficiaries are likely to feel exploited by a corporate giant, rather than be able to appreciate the gift bestowed by their generous predecessor. The words “trust” and “trustee” seem to take on an antiquated meaning in these new world circumstances.
Tips if you are in This Situation:
- Consult with a good estate attorney before signing or if you have any misgivings about signing. The purpose of this post is to shed light on an increasingly common scenario for beneficiaries. It is not legal advice. Get good legal advice!
- Try to discuss the matter with the Trust Department of the bank. Some people might work out an agreement that does not include the indemnification clause.
- Ask if fees will continue while the discussion of the agreement proceeds. They may not be entitled to fees.
- Stay focused on the generosity of the gift from your family member. People who have recently lost a loved one and have to deal with confusing, time-consuming legal and financial matters after the death are often emotionally vulnerable. Remember the positive intent of the gift.
- A trust that leaves money to a group of heirs is referred to as a “pot trust.” Avoid this. Instead, leave to individual heirs. Generally, it will save them from this concern.
- If you are the one leaving the trust to your children: Please discuss this and other aspects of the trust with them in advance. The more they know now, the fewer headaches they will encounter in the future. After all, that is why you want to leave them this valuable resource- to make life smoother.
Leslie Eckford is an RN and LCSW with a specialty in elder care. Her book with co-author, Amanda Lambert, “Aging with Care: Your Guide to Hiring and Managing Caregivers at Home”, was published in November, 2017 by Rowman and Littlefield.