Many clients look to CPAs as the natural choice to fulfill the trustee role, manage the assets, and carry out client wishes. For CPAs good at managing and minimizing the unique risk attributes of a trustee role, trustee work can be satisfying and rewarding. On the other hand, if a CPA underestimates trusteeship risk, what may appear to be a safe and simple role can become a Pandora’s box of sibling rivalries, aging parental battles, 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 (regrettably quite common).
In responding to a recent uptick in trustee-related claims, CAMICO has identified common scenarios that pose significant liability exposure if not managed properly.
Most of CAMICO’s trustee claims involve dysfunctional family relationships. 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.
The baggage of family relationships frequently exacerbates disputes. It is not uncommon for the trustee to be pressured to resign by a family member in line to become the successor trustee, or for the trustee to be wrongfully accused of favoring the interests of one party to the detriment of another.
Given the frequency of such scenarios, we strongly encourage CPAs to identify and evaluate potential family risk attributes. Consider the following questions before deciding to accept a trustee role, as these may identify significant red flags that elevate the risk profile of the trustee opportunity.
• What is the potential for dispute among beneficiaries and the settlor? Are there differential distributions that may appear inequitable (e.g., disparate treatment of siblings)? 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?
• Do beneficiaries have substance abuse problems, mental illness, or behavioral issues?
• Has there been prior litigation between or among the beneficiaries, trustees, or custodians/guardians? If so, is one or more parties more litigious?
• Were there problems with a prior trustee? If unresolved, these problems are now your problems. Also, were you to accept the role as a successor trustee, you would have a duty to investigate the predecessor’s management of the trust.
Best practice would be to have anyone contemplating serving as a trustee 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.
Additional risks associated with trustee work include but are not limited to:
• Actual or perceived trustee conflicts of interest
• Failing to disseminate required accounting
• A lack of understanding of, or appreciation for, trustee fiduciary duties and other trustee responsibilities
• Blurring the line between traditional CPA services and “quasi-trustee” services
Loss Prevention Best Practices
Apply appropriate safeguards to address the common and unique risk threats associated with trustee services. Although not meant to be all-inclusive, the following safeguards are some best practices to consider:
• First and foremost, it is prudent for firms to establish a firm-wide policy regarding the specific protocols and procedures for accepting and monitoring trustee engagements. The firm policy should be tailored as appropriate to reflect the protocols and procedures your firm implements.
• 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.
• Make a clear distinction between the trustee services provided by the firm member and any non-trustee services (e.g., accounting, tax) that the firm may provide. If your firm will perform other tax, accounting and special project work for the trust, best practice is to use engagement letters to define the scope, limits and responsibilities for these traditional services. In addition, these services should be performed and reviewed by a qualified firm member other than the trustee. This will help to establish that the relationship between the firm and the trustee is arm’s length in perception and reality.
• Document, document, document. Defensive documentation is critical to minimize potential risks, to prove that you have fulfilled your duties of care, and to keep interested parties informed.
• Stay educated and informed on the duties and responsibilities of the trustee role.
• Contact your professional liability insurance agent or carrier before accepting a trustee or executor engagement so that they can help you evaluate the risks and assess any potential coverage issues.