Paul L. Caron

Monday, May 16, 2011

The Real Beneficiaries of Long-Term Trusts

Following up on Sunday's post, $100m Rule Against Perpetuities Bequest: Lives-in-Being + 21 Years = 92 Years, and the observation of Tax Prof Bridget Crawford (Pace):

What is eye-popping is that the trust's current value is $100 million to $110 million.  How can that be, if Mr. Burt's estate had a date-of-death value of $40 million to $90 million?

The trustee,  Citizens Bank Wealth Management, has asked to retain a reserve for termination fees and expenses, as is standard in these types of proceedings.  If I were representing the trustee, I'd be worried about more than just termination fees, though.  I'd be worried about a breach of fiduciary duty claim due to poor trust performance. ...

Who really benefits from a trust like the one created by Mr. Burt?  Seems to me like the big winners are the trust professionals (bankers and lawyers) whose fees have and will be paid out of the trust.  

Tax Prof David Elkins (Netanaya College School of Law, Israel; SMU)) crunched some numbers:

An estate of $40-$90 million grew to $100-$110 million in 92 years??? I think I would have long ago fired the fund manager.

According to this site, $40 million invested in 1919 in a Dow Jones Industrial Index with dividends constantly reinvested should now be worth over $138 BILLION. If the estate was $90 million, it would now be worth over $311 BILLION. True, reduce that by taxes on the dividends, fees and the small legacies he left to his children and staff, but still...

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"I think I would have long ago fired the fund manager."

I have worked with old trusts like this. The problem is (1) they usually do not allow the trustee to be fired and (2) they usually specify a specific fee for the trustee/investment manager. The fee is almost always shockingly low. It prevents the trustees/investment managers from putting real time into working with the monies or putting them into real investments (that charge higher fees more realistic in today's world). As a result, trust companies usually create a really bad proprietary fund and just put all the money in that, as it satisfies their fiduciary duties if they do so.

One would think that the trust company would modify or reform the trust--but they usually cannot do that. They worry about the tax ramifications (i.e., losing GST tax exemption) and losing the rest of the family's business (such as the charitable trusts, which also have investments that make the trustee money).

These older long term trusts are just money losers--because of the terms of the trusts. The taxpayers would be better off having the estate tax eat 50% at each generation.

Posted by: Gary | May 16, 2011 2:19:58 PM

Another article suggested that some of the principal had been distributed over the years. I'd also wonder whether the trust provided for any use of the income beyond the specific bequests mentioned in the will. I.e., it could have been a pour-over will to an existing trust. Finally (though not a litigation defense) had the family had the money from the start, there's a pretty good chance they would have wasted it (and their lives) anyway.

Posted by: Matt | May 16, 2011 3:29:09 PM

I too was initially shocked about this and put up a comment on the lousy return over 92 years. What I have read does not indicate if the $40 million figure is his gross pre-tax estate or his post tax estate all of which went into the trust. He died in 1919 and we got our estate tax in 1916, so if the reported figure was his gross pre-tax estate and the rates were sufficiently fierce, perhaps we should not be too surprised with the results. I will leave it to others to research rates and run the numbers if they wish. Given that the testator had originally intended to give most of his estate to charity and changed his mind in some spat with local authorities, the local newspapers may not be the most reliable source for getting all of the precise details.

Posted by: Bill | May 18, 2011 12:09:32 PM

It also dawned on me after my previous post that back in the old days fiduciaries were limited to lists of legals for investments. So if it was a pre-tax gross estate tax figure that was reported and the estate tax rates were fierce and the bank was limited to a lousy list of legals, then there may be no surprise.

Posted by: Bill | May 18, 2011 12:15:02 PM