The Risk of Trusts

The Trust industry is overwhelmed

Cost reductions and mergers have resulted in Trustees being stretched over an increasingly large number of trusts.  In addition, there are more and more smaller trusts, that do not contain the level of assets that could cover the expense of proper administration.

The tools that might help trustees and fiduciary institutions manage these trusts have not kept up with the times.

The result:  

  • Financial performance risk
  • Increased cost to the insitution
  • Regulatory and legislative risk to the insitution

Management risk to the insitution inreases if the trust passes from one trustee to another, as undocumented decisions can move the trust away from its original intention or serve as a basis for liability.





Trustees often have an inherent conflict of interest, and the trustee is put in the no-win situation of having to choose between the two:

                   Serve the fiduciary needs    VS    Serve the beneficiary needs

How can the trustee make the right decisions? 

The beneficiary's ability to make a decision regarding the trust, or the fees that compensate the trustee for the risk, mean that the beneficiary is most often the one bearing the brunt of this conundrum.

We see these risks beginning to shift to the trust administrator and the fiduciary institution, in terms of litigation, market risk and regulatory involvement:

Litigation is increasing as a way to move the responsibility for the risk to the fiduciary.  Recent successful litigation has challended specific decisions, fee structures and levels, portfolio performance and disbursements.  As beneficiary awareness of this litigation increaeses, the level of litigation will increase.  Lawyers view trust litigation as a growing market.     Market risk is also increasing.  Assets in trust continue to increase, but professional fiduciary assets have continued to decrease as grantors pursue other channels such as personal trusts or non-traditional fiduciaries like brokerages and specialty trust companies.  These channels can provide higher perceived levels of service for comporable costs and lower risk because of their focus on a special type of trust.  This may doom the traditional professional fiduciary to reduced profits as the more profitable trusts are cherry-picked and the major financial insitutions are left with the less attractive, higher risk trusts.    Regulatory risk in increasing.  The recent Basel 2 memos have increased awareness of operating risk and forced regulators to begin to quantify and define ways to assign the risk of many of the bank's activities.  Fiduciary activities are viewed by the OCC as a large and poorly understood set of potential risks, as regulators have indicated they want to get a handle on the trust industry and the risks associated with trust administration.


The Risk of Trusts

The New View of Trusts

The New View System

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  • Over the next 50 years $45 trillion will be transferred to heirs and charities via estates - the largest wealth transfer in history.

    How much will be siphoned by trustees...lost to estate taxes...lost to administrative fees or lawyers fees...other fees?

    How well will these trusts be managed?

    What kinds of investments should be made with the money under management?

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