CAMICO is seeing an uptick in the number of trustee-related claims. In responding to these claims, CAMICO has identified common scenarios that pose significant liability exposure when not managed properly.
Trustee-Related Claims TrendsTrend # 1: Dysfunctional families
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 looks at the relationships among the interested parties, especially in family situations, and decide whether the risks posed by them can be managed and minimized.
The baggage of family relationships frequently exacerbates disputes. It is not uncommon to see a claim like the one showcased below where the trustee has been pressured to resign by a family member in line to become the successor trustee, or situations where the trustee is wrongfully accused of favoring the interests of one party to the detriment of another.
The CPA was engaged to be a co-trustee and to provide tax return preparation for a long-time client who had passed away. One of the beneficiaries (in line to be a successor co-trustee) alleges that the CPA colluded with the other co-trustee (a beneficiary) to deprive other beneficiaries of their inheritance. The CPA asserts that he has not favored the interests of the co-trustee to the detriment of the beneficiaries and has complied with the co-trustee duties detailed in the trust agreement.
Given the frequency of these 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 escalate 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 distribution scheme or status of beneficiaries?
- 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?
- Were there problems with a prior trustee? Remember those problems are now your problems if unresolved. Also, were you to become a successor trustee you would have a duty to investigate the predecessor’s operation of the trust.
Best practice would be to have anyone contemplating serving as a trustee complete a client screening evaluation tool. This tool helps assess whether trustee opportunities fall within the firm’s risk appetite and are a good fit. CAMICO has developed a Trust Reporting Form for the client screening evaluation tool. The Trust Reporting Form is available via a link found in the IMPACT 114 email. It is also on the CAMICO Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2019, IMPACT 114.
Trend #2: An actual or perceived trustee conflict of interest
A trustee must pay special attention to any conflicts, perceived (from the perspective of co-trustees, beneficiaries, etc.) or real. At a minimum, CPAs who take on trustee roles must ensure that they comply with the AICPA's Code of Professional Conduct ("Code") for addressing Conflicts of Interest [ET 1.110.010]. But this minimum is NOT a guarantee of safety. Remember in court, perception rules!
A CPA should use professional judgment and apply the conceptual framework approach as outlined in the Code when assessing a trustee opportunity to identify situations that may pose significant threat/risk related to a potential conflict of interest. For example, a CPA should fully consider the nature of the relationships as well as the relevant interests of all affected parties (i.e., settlor, beneficiaries, and other key stakeholders), and the implications of these relationships/interests to the responsibilities, duties, and personal interests of the trustee.
If potential conflicts are identified, the CPA should assess whether there are reasonable safeguards to eliminate the threat or reduce the threat to an acceptable level. If the answer to that assessment is no, the trustee opportunity should NOT be accepted. If yes, the CPA has the option of accepting the position; in those situations, the CPA should disclose the nature of the potential conflict to all parties (i.e., settlor, beneficiaries, and other key stakeholders) affected by the potential conflict and obtain their consent1 to perform the trustee role. If consent is not forthcoming from all parties, the CPA should decline the trustee position.
If consent is forthcoming and the trustee role is accepted, it is critical that the trustee identify, manage and monitor any impacts of the potential conflict, whether perceived or real, to minimize risk exposures.
As noted in the scenario below, not disclosing a potential conflict of interest (perceived or real) does not play out well in a claim situation:
The CPA acted as trustee for two separate trusts. The trusts’ beneficiaries were related and sought to have the CPA removed as trustee of both trusts, alleging he had overcharged for his services. During mediation, it was discovered that the CPA had commingled the trusts’ funds, acted as an investment advisor, and invested trust funds through an entity he owned. The CPA hadn’t disclosed these potential conflicts to the respective beneficiaries.
Even if a trustee was deemed to be in compliance with the AICPA's Code of Professional Conduct, there could remain potential exposure from a "claims standard" perspective. CAMICO policyholders have incurred significant losses and expenses in situations where the trustee satisfied the "rules-based" professional standards but didn't meet the "reasonable person" test of the "claims standards." As such, it is prudent to obtain approval from the beneficiaries or the court for actions or decisions in which real or perceived conflicts could be alleged.
Trend # 3: Failing to disseminate required accounting
Consistent periodic reporting is critical to ensure that all affected parties are kept informed. Reporting starts the clock ticking on the time within which anyone can object to a trustee’s action or decision. Periodic reporting should include any financial information as well as any other information necessary for the beneficiaries and others to be fully informed. From a risk management perspective, "sunshine" is the best disinfectant.
Without clear and consistent communication between the trustee and the beneficiaries or other interested parties, the trustee may be viewed as falling below the “standard of care” for such services. Consider the following claim scenario:
The CPA was engaged to be the trustee and to prepare the trust tax returns for a long-term family client. A beneficiary of the trust alleges that the CPA made an error by selling a piece of real estate without his knowledge and consent and that the CPA failed to provide him with trust accountings. The CPA asserts that the consent of the beneficiary was not required for the sale of the real estate in accordance with the trust agreement and that the trust agreement was silent regarding special reporting requirements to the beneficiary.
Claims like this are not unusual and are potentially avoidable. Making sound decisions in accordance with trust terms is critical, but it is not always enough to avoid potential pitfalls like the scenario above. Beneficiaries who feel left out of the communication loop are considerably more likely to allege that the trustee acted inappropriately. Therefore, even if not specifically required under the terms of the trust, periodic reporting provides trustees with good defensive documentation.
Trend # 4: A lack of understanding of, or appreciation for, trustee duties and responsibilities
As with all engagements, competency is critical. As a CPA, it is important to possess the knowledge and expertise required to perform the fiduciary work of a trustee. This includes not only satisfying the fiduciary obligations and the required "duties of care" applicable to the trustee role, but also to possess and display the business acumen required by the nature of the assets held in the trust.
For example, if a business is being managed by the trust, the trustee should understand the business and possess or obtain the expertise required to manage the business or run the risk of falling victim to a claim allegation similar to the below scenario:
The CPA was trustee for a large family trust that held, among other assets, a winery business and related property. The beneficiaries sued the CPA alleging that they had a significant loss because of the trustee’s refusal to wait and consider more attractive offers to buy the winery. In addition, they alleged that he lacked the competency to manage the winery and failed to ensure appropriate oversight of other business activities. The CPA stated that his main responsibility as trustee was to liquidate the trust’s assets and that he had done so by finding a buyer for the winery. He also argued that his lack of any prior experience with the wine industry had no bearing on his competency as trustee.
Engagement letters for trustee services are not always necessary as in theory the duties and responsibilities of a trustee are enumerated in a trust document. However, engagement letters for trustee services are desirable when the trust instrument is not specific or is silent on some areas important to the trustee and/or the beneficiaries. In instances such as this, an engagement letter should be used to help clarify trustee duties and responsibilities and any other matters of importance not adequately addressed in the trust instrument. An example of this might be how the trustee fees are determined. If the trust instrument doesn’t adequately address fees, an engagement letter would serve to clarify this issue and to avoid beneficiary allegations claiming that fee arrangements were not adequately disclosed or were excessive.
In addition, CPAs who serve as trustees should adopt a simple governance process that demonstrates that they (1) know their duties of care and (2) have records evidencing they have taken affirmative steps to fulfill these duties. For more information regarding this type of governance process, refer to the article titled The CPA's Introduction to Serving as a Trustee, written by Anodos Advisors' Josh Yager and Ryan Wolfshorndl (published in CAMICO's IMPACT 112, October 2018), which is available on the CAMICO Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2018, IMPACT 112.
Trend # 5: Blurring the line between traditional CPA services and "quasi-trustee" services
Typically, CPAs are engaged to perform tax, accounting and/or consulting services for a fiduciary entity that is either a trust or estate. The fiduciary (i.e., trustee) is the party that hires the CPA to perform services for the entity, and an engagement letter issued by the CPA to the trustee specifies the scope and limits of the services to be performed.
However, sometimes the line between traditional CPA services and "quasi-trustee” services becomes blurred, and CPAs may step into fiduciary duties without realizing they have done so, or without realizing the scope and complexity of such duties. Because of the rigors and risks of fiduciary duty, it is essential that such duty be taken on knowingly and willingly. The inadvertent imposition of fiduciary duty on an advisor relationship exposes the CPA to significant additional risk as exemplified in the claim scenario below:
The CPA agreed to perform services for the client similar to a receivership/trusteeship where he was to liquidate assets and pay off creditors, although no written engagement letter was executed for such services. The husband, a dentist, was severely injured, and his wife had his power of attorney. The wife, based on advice from her attorney, requested that her husband’s dental practice and other assets be put in an irrevocable trust for the benefit of the creditors, and the CPA was responsible for determining the payments to be made to the creditors. Funds weren’t enough to pay off all of the creditors; one creditor refused to accept less than owed since he had a personal guarantee from the CPA's client. The husband recovered from his injuries and was then sued by the creditor, which prompted the husband to sue the CPA for failing to obtain a release of personal liability from all creditors.
It is critical to review and monitor engagements for potential areas that could blur the line with fiduciary exposure. Documentation is important in this regard. A CPA should tailor the services within manageable areas of risk and have adequate documentation to support the scope and limits of the services performed.
Loss Prevention Best PracticesApply appropriate safeguards to address the common 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. Refer to CAMICO’s Sample Firm Policy for Executor/Trustee Services Acceptance, which is available via a link found in the IMPACT 114 email. It is also on the CAMICO Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2019, IMPACT 114. The firm policy should be tailored as appropriate to reflect the protocols and procedures your firm implements.
- Prior to accepting the role of trustee, 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 to the trustee role 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 with an engagement letter. Refer to CAMICO's guidance on Items to Consider in a Trust Document, which is available via a link found in the IMPACT 114 email. It is also on the CAMICO Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2019, IMPACT 114.
- Make a clear distinction between the trustee services provided by the firm member and any non-trustee services (e.g., accounting, tax) that may be provided by the firm. If your firm is to perform other tax, accounting and special project work for the trust, best practice would be 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 another qualified firm member and not 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 and DOCUMENT. Defensive documentation is critical to minimize potential risks and prove that you have fulfilled your duties of care, as well as keeping affected parties informed.
- Stay educated and informed on the duties and responsibilities of the trustee role.
- And lastly, contact CAMICO before accepting a trustee or executor engagement so that we can help you to evaluate the risks and assess any potential coverage issues.
For additional information, please refer to the Trustee/Executor Services Resource Center on CAMICO’s Members-Only Site. CAMICO policyholders with questions regarding this communication or other risk management questions should contact the Loss Prevention department at firstname.lastname@example.org, or call our advice hotline at 800.652.1772 / 650.378.6800 and ask to speak with a Loss Prevention Specialist.
1 The Code of Conduct requires obtaining consent but does not mandate the consent being in writing. Treasury Circular 230 mandates consent be in writing. Written consent is preferable from a risk management perspective as it provides defensive documentation of consent.