When you deal with trust fund administration, there is a lot that can go wrong. The typical pitfalls are usually related to the fact that the beneficiary of the trust is not the one who made the money that got submitted into the trust as principal, meaning there is no indication that the person receiving the money has the sophistication to adequately manage financial affairs.
The other pitfalls typically relate to traditional agency issues—the person who makes investment selection and distribution decisions for the trust fund (the trustee) is not the same person that is actually receiving the money (the beneficiary) so problems can arise from this disunity of self-interest. The self-interest for the trustee is to keep as much money in the trust fund as is permissible, as most banks and trust fund administrators charge a certain percentage of the assets each year.
Every $100,000 distribution from a trust fund charging 1.50% in management fees means that annual fees decrease by $1,500. Sometimes, this motive can overlap to serve the self-interest of the beneficiary who would otherwise squander the funds, but other times it can hinder the intended use of the trust’s assets if the distributions result in surplusage accumulation at the expense of letting a beneficiary maintain a desired lifestyle.
Sometimes, people think these discussions are all just theoretical. To drive home the point of how financial unsophistication can create a deadly cocktail when mixed with traditional agency issues, I’d like to point your attention to an April 2009 court case decided by the Missouri Eastern District Court of Appeals called Klinkerfuss v. Cronin.
In 1995, Erna Strawn set up a trust fund with almost $400,000 in it to be put into two equal shares for her daughters Elaine Klinkerfuss and Delores Cronin. Upon her death, the trust was to be administered by Delores’ son, William who worked in the finance industry. This created a problem from inception, as the trustee William Cronin could have an inherent bias in favor of his mom should any dispute arise between the two beneficiaries.
Erna Strawn considered this a risk worth talking—deeming that the advantages of having someone familiar administer the trust outweighed any bias issues in the event of beneficiary disputes with the other. At the time, it seemed like a reasonable calculation on Erna’s behalf, as the trust contained identical assets for both beneficiaries and the terms of the trust were set to deliver three separate distributions after Erna’s death and the trust would be dissolved after the final distribution ten years after Erna’s death.
She died in 1999. The plan was for Elaine and Delores to each get around $70,000 in 2001, 2004, and 2009. With a little bit of growth during the years between payments, maybe the final distributions would have been closer to the $85,000-$100,000 range. Pretty straightforward, not a lot of seeming room for error.
After Erna died in 1999, Elaine got the idea in her head that the trust fund was keeping her rightful money from her, and she told William that she wanted to fire him and his bank as trustee and she wanted to receive her full $200,000 outright. We don’t publicly know what privately motivated William in his response, but he sent Elaine a letter correctly pointing out that he was obligated to follow the terms of the trust instrument and he would not be discharging his duties properly if he ignored the express terms of the trust fund that called for three distributions spaced out after Erna’s death.
Elaine decided to sue to have William removed as trustee and to have the trustee broken up in her favor. This case went to trial, and Elaine properly lost the case because the Missouri trial court held that the express terms of a trust fund cannot be ignored in favor of a beneficiary’s personal distribution preferences.
She had a really weak legal argument, and she lost. Nothing worth talking about there.
But here is the part I want to call to your attention. William Cronin and his mother Delores filed a motion arguing that the attorney’s fees to defend the action should have been paid out exclusively from Elaine’s share of the trust.
There are two parts of the analysis here: First, who usually pays for the cost of litigation related to the administration of the trust? The trust fund does.
Secondly, when does one party have to bear the entire cost of litigation exclusively from their beneficiary share of the trust fund? Missouri, like most states, has a statute stating that a judge may do so when “justice so requires” which the Klinkerfuss decision defined as when one party acts selfishly to cause injury to another beneficiary.
This is why you should be extremely, extremely, extremely hesitant to ever get involved with litigation involving a trust fund that you stand to benefit from. The trustee is authorized by law to bill all of their expenses to the trust itself. And if your claim is truly meritless, then it might come exclusively from your own share of the trust.
In Elaine’s case, she had already received her first $70,000 distribution at the time this went to trial. She had about $140,000 or so remaining in the trust. But the entire legal fees—for both herself and the trustee—totaled $161,728.95 from three St. Louis law firms. And the court found that her entire share of the was exhausted, and they ruled that she would be personally liable to pay the remaining $21,000 to the lawyers.
The Court said: “If a beneficiary chooses to litigate capriciously and to proceed with vexatious and groundless litigation, then she should pay for it.”
The Court went on to hold: “The value of the trust at Erna Strawn’s death was $425,181, and the trust has incurred $244,524.09 in attorneys’ fees and expenses, including amounts not yet awarded, in defending against the beneficiary’s vexatious litigation. The attorneys’ fees and expenses already awarded and appealed here have exhausted, and in fact exceeded, the beneficiary’s share of the trust that remained after payment of the beneficiaries’ first distribution, trustee fees, and reasonable and necessary administrative fees and expenses. Had the beneficiary allowed the trust to proceed without litigation, she would have received her second distributive share in July 2004, and she would receive her final distributive share in July 2009.
Because of the beneficiary’s actions, the trustee was forced to defend the trust and its administration against meritless claims, which the beneficiary pursued for selfish reasons. The trustee has gone through two extended processes to obtain attorneys’ fees and expenses incurred in defending the trust against the claims of a single beneficiary and is now defending against that single beneficiary’s third appeal in this relentless and vexatious litigation. In her brief and at oral argument, the beneficiary even raised the prospect of another suit against the trustee in an effort to compel a distribution to her from the trust, a request previously rejected by the trial court. And despite the findings and conclusions that are clearly the law of the case, the beneficiary has continued, both at the remand hearing on attorneys’ fees and here on appeal, to seek their relitigation.
Authority for awarding attorneys’ fees against the beneficiary personally exists, both in section 456.10-1004 and in the cases that apply an exception to the American Rule for a party’s intentional misconduct. Had there been no litigation expense, the trustee reports that as of July 22, 2004-the date the beneficiaries’ second distributive shares would have been paid under normal circumstances-the trust would have been worth $230,448, or $115,224 for each of the two beneficiaries.”
Elaine’s actions turned hundreds of thousands of dollars in wealth she could have received into a $20,000+ bill that she had to personally pay. While she deserved to lose, I understand how someone can get a certain thought stuck in their head, and then pursue it incrementally—no individual step seems that extreme compared to the last one, but when you look back upon the event cumulatively, you wonder how you could have made such a grave error. Ill-advised, just like money, can compound.
I take three lessons from her experience:
(1) Be patient. Even if she won her appeal, this case didn’t resolve itself in court until 2009. At that point, she would have received all of her distributions anyway. Litigation over the timeliness of an action carries a high probability of costing you more than just waiting the event out.
(2) Trustees are quite good at billing trust funds for litigation and other administrative costs. It’s not a cost borne by the bank. If you sue a trust, you are basically suing yourself. Any desire a trustee has to keep a trust fund balance high is remote compared to the immediate, tangible risk of being accused of breaching a fiduciary duty. Good lawyers will get hired, and you’ll have to pay for it one way or the other.
(3) I think Erna made a mistake by naming William the trustee because of his natural disposition to favor his mother over his aunt. There are very few financial matter that are so simple and straightforward that the risk of litigation can be a nullity. I understand why Erna didn’t use separate trusts because the principal was only $400,000+ and the administrative costs of administering two $200,000+ trusts could be unjustifiable, but I suspect this whole thing could have been avoided by finding a truly neutral trustee to administer the payments from the trust fund. At a minimum, a non-interested party may have had more credibility in rejecting Elaine’s requests for early disbursements.
Since I touch on legal issues, I’ll include the disclaimer: This website includes information about legal issues and legal developments. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. You should contact an attorney for advice on specific legal problems.