Claim Chronicles 124-A
Topic: Trustee Role, Services
Seth Johnson was married multiple times and had eight children from previous marriages. He married Lindsey Johnson in 2012 and was married to her until his death in 2018. In 1991, Mr. Johnson established the Seth Michael Johnson Living Trust. Upon his death, the Trust was to be distributed and administered for Mrs. Johnson’s benefit: cash in the amount of $2.5 million. The trustee was to pay to or for the benefit of Mrs. Johnson the entire net income of the Trust (at least $20,000 per quarter). She had the right to sell and replace the current property with another of equal or lesser value of her choosing (Mrs. Johnson had a life estate in the Trust property).
After her husband’s death, Mrs. Johnson wanted to move to Connecticut to be near her family. She wanted her son to be responsible for building the replacement property pursuant to the Trust provisions. The original home that she occupied was sold (netting approximately $1.7 million); a lot in Connecticut was purchased with funds from the Trust. In 2020, CPA and trustee James Sutton took the position that the Trust would not pay any costs for the replacement residence that exceeded the sale proceeds from the original property. He stated that Mrs. Johnson did not have the discretion to use any portion of the $2.5 million in Trust assets for the construction of the residence, as Mrs. Johnson only had a life estate in the Trust assets. Consequently, Mr. Sutton refused to pay the property taxes for the Connecticut lot.
In the meantime, Mrs. Johnson requested accountings from Mr. Sutton, which complied with his obligations under the California Probate Code. Nonetheless, he did not provide such accountings, which were compliant with the Code. He also allegedly failed to administer the Trust for the benefit of Mrs. Johnson and failed to distribute income to her as required under the Trust provisions.
Select the answer that is the correct response.
1. What is at stake for Mr. Sutton if Mrs. Johnson’s claims are ruled in her favor?
a. He could be suspended or removed from the trustee role.
b. He could be charged with financial elder abuse.
c. He may have to pay for damages pursuant to the California Probate Code.
d. All the above.
2. Are there restrictions with a life estate?
3. What best practices can CPAs instill before agreeing to render trustee work? (Answers below)
1. d. All the above. If a CPA underestimates trusteeship risk, what may appear to be a safe and simple role can become a complex situation of competing interests, disruptive lawsuits, and financial losses. The result can cause emotional stress and become a sink hole of wasted time and money, especially if clients and beneficiaries are dysfunctional. CAMICO claims experience shows that one of the most common sources of risk in trusteeships is a lack of understanding by the trustee or co-trustee regarding their fiduciary duties and responsibilities. Trustees must adhere to laws and regulations governing their role as a fiduciary.
2. a. True. A life estate is a legally binding family transaction that entails certain terms and restrictions on the assets. Depending on the contract and state, often a life tenant needs certain approvals to sell or lease the home and is still responsible for making property tax payments and maintaining insurance as if they still own the property outright.
3. To address the common and unique risk threats associated with trustee services, CPAs can apply appropriate safeguards such as:
- Prior to accepting a trustee role, examine the underlying trust document thoroughly and have it reviewed by a qualified trust attorney. There may be opportunities to edit the trust agreement to minimize risk if the trust document is not yet finalized or if the settlor of the trust is still alive. In addition, there may be some ambiguity within the trust document that should be clarified in an engagement letter.
- Defensive documentation is critical to minimize potential risks, to prove that you have fulfilled your duties of care, and to keep interested parties informed.
- CPAs can complete a client screening evaluation form. Such forms help trustee candidates and their firms assess whether the opportunities fall within their risk appetite and are a good fit.
Claim Chronicles 124-B
Topic: Trustee Role, Services
After battling a terminal illness, renowned painter and philanthropist Rob Smith passed away on January 2, 2017. RST held Rob’s assets and the Smith Art Trust (a sub-trust of the RST) was established to own the rights of and collect royalties from the use of Rob’s name, likeness, and artwork. The trustees of the Art Trust were CPA Keith Jones, Rhonda Sanders and Eric Smith (Mr. Smith’s son from his first marriage with wife Emma Williams). When Mr. Smith passed away, he was in the process of divorcing his third wife, Melanie Smith.
In 2018, litigation emerged over the terms of the RST and the case was settled in 2019, with Ms. Smith receiving a share of the proceeds. Mr. Jones resigned as a trustee in 2020, and the other trustees signed off on his resignation. He confirmed via email (with Ms. Sanders) that the beneficiaries had been notified; she verified that they were informed. Unfortunately, there was no record of Mr. Jones informing the beneficiaries. So in 2021, Ms. Smith filed suit in Probate Court to compel accountings and instruct the trustees to deliver Trust property to her, and to surcharge the trustees. The Petition did not include any allegations specific to Mr. Jones – generally, they were against the co-trustees as a group. The Court ordered the other trustees to prepare the accountings and in 2022, Ms. Smith filed a brief seeking to keep Mr. Jones in the case. She alleged that he was jointly and severally liable for breaches of trust revealed by co-trustee Mr. (Eric) Smith’s accounting. She claimed that Mr. Jones was aware that the other trustees were misappropriating trust assets and that he failed to take any action either because of greed or gross negligence. She also alleged that Mr. Jones’s resignation in 2020 was ineffective, as he failed to notify the beneficiaries required by the trust. There was a hearing held that dealt with who would be the beneficiary of Mr. Smith’s life insurance policy – which listed his wife – however, the couple was in the process of finalizing their divorce. Despite Ms. Smith’s stance to be named the sole beneficiary of Mr. Smith’s policy, the judge ruled against her and limited her claim to one-quarter of the policy and that the remaining amount go to his estate. Mr. Jones’s records indicated that the proceeds from the sales of artwork were correctly allocated to each trust, contrary to the plaintiff’s (Ms. Smith) allegations. His argument was that she was not a beneficiary (so no notice was owed to her) and that he notified all adult beneficiaries of his resignation.
Select the answer that is the correct response.
1. What are the biggest risks / mistakes that CPAs can encounter in a trustee role?
a. Not having a thorough understanding of the trust agreement and abiding by it.
b. Failing to disseminate required accounting.
c. Actual or perceived trustee conflicts of interest.
d. All the above
2. Most CAMICO trustee claims involve dysfunctional family relationships.
3. Was it Mr. Jones’s responsibility to notify beneficiaries of his resignation as trustee?
1. d. All the above. CAMICO claims experience shows that one of the most common sources of risk in trusteeships is a lack of understanding of, or appreciation for, the duties and responsibilities of a trustee. CPAs should be sure to become educated, informed, and competent in the skills needed to render trustee services before attempting to provide them. Fee and billing issues are also a source of risk as well.
2. a. True. In trustee work, it is easy to think you are merely an innocent bystander dragged into a family dispute. Prospective trustees should take long, hard and objective looks at the relationships among the interested parties, especially in family situations, and decide whether the relationship risks can be managed and minimized. Given the frequency of such scenarios, CAMICO strongly encourages CPAs to identify and evaluate potential family risk attributes such as, “What is the potential for dispute among beneficiaries and the settlor? Have there been multiple marriages, with offspring from each? Have there been recent changes to the planned distributions or status of beneficiaries? Or, is there a beneficiary committee that meets regularly and can help mitigate some of these risks?”
3. a. Yes. Mr. Jones was responsible for giving notice (of his resignation as trustee) to “adult” beneficiaries. However, Mr. Jones’s counterargument was that the couple’s 11-year-old daughter was not an adult, and that Ms. Smith was not a beneficiary. Although the Smiths’ divorce wasn’t finalized before Mr. Smith passed away, he had changed his life insurance beneficiary designation and didn’t list Ms. Smith’s name in his will or trust as a beneficiary.
The “Claim Chronicles” are drawn from CAMICO claims files and illustrate some of the dangers and pitfalls in the accounting profession. All names were changed.