Bank's Opening of Safe-Deposit Box Leads to Trial on Missing Cash Claim

Opening safe-deposit boxes is a part of most probate administrations.  Banks are usually sticklers for protocol, which is understandable given their liability exposure if anything goes wrong.  Fortunately, Florida has a detailed statutory scheme governing access by fiduciaries to safety deposit boxes (see F.S. 655.93 - F.S. 655.94 and F.S. 733.6065).

Wachovia is learning the hard way that people will sue if things go wrong, as reported by Daniel Wise in Bank's Opening of Box Leads to Trial on Missing Cash Claim.  Here's an excerpt:

An elderly woman's claim that Wachovia Bank was liable for $75,000 allegedly lost when it authorized unsupervised locksmiths to break into her safety deposit box should proceed to trial, an acting Supreme Court justice in Manhattan has ruled.

The bank's failure to check one of its computer databases to see if the box had been rented raises a triable issue of fact as to whether the bank committed "gross negligence," Justice Michael Stallman ruled last week in Glassman v. Wachovia Bank, 115380/06.

In early 2005, Roberta Glassman, who has residences in Manhattan and Florida, rented a self-service safe deposit box at the Wachovia branch in West Palm Beach, Fla. Under the agreement, she was to be given the only keys.

The agreement also provided that any missing contents were Glassman's responsibility and that "the Bank has no liability whatsoever unless the loss is caused by the Bank's gross negligence, fraud or bad faith."

Glassman, 74, claimed that when she left in May 2005 for a trip to Europe, she removed $3,000 in cash from the safety deposit box, leaving $87,000 in $100 bills and a $100,000 Suffolk County bond.

However, an envelope bearing the box number and containing keys was mistakenly included in the bank's inventory of unrented boxes. The keys did not open her box.

On May 27, 2005, a short time after Glassman left on her trip, the bank called in locksmiths from Diebold Incorporated.

The bank's lawyer, Jocelyn Keynes, said it was the bank's policy not to supervise the work of locksmiths on unrented boxes. In this case, the locksmiths soon realized the box had been rented because it did not have a piece of white Styrofoam normally found between the door of unused boxes and the actual container for valuables.

The locksmiths, according to the lawyer's affidavit, then summoned two bank employees, who inventoried the contents of the box as $12,000 in $100 bills and the $100,000 bond.

Both sides sought summary judgment upon Glassman's claim. Wachovia claimed it had acted reasonably, and had certainly not been grossly negligent.

Stallman found that the agreement's gross-negligence provision was sustainable under both New York and Florida law.

Although the case referred to in the quoted piece [Glassman v. Wachovia Bank, 115380/06] is out of New York, fortunately for us in sunny Florida the court skirted the choice of law issues by simply applying both New York and Florida law.  Florida practitioners should find the following useful:

  • Exculpatory clauses in safe-deposit box agreements are enforceable.

[I]n Florida . . . an appellate court has held that the limitation of liability provided in a safe deposit box agreement which limited the bank's obligations for loss to instances of gross negligence, fraud or bad faith was . . . [enforceable]. F.D.I.C. v. Carre, 436 So.2d 227, 229-230 (Fla App 2d Dist 1993)(court noted that whether or not “a customer is wise to enter into an agreement such as the one in this case, we cannot find that the agreement was against public policy.”). Thus, under the laws of New York and Florida, an exculpatory clause, such as the provision contained in the subject Agreement that limits a party's liability to grossly negligent conduct, is enforceable.

  • If a gross-negligence exculpatory clause is enforceable, then what is "gross negligence"?

The Florida courts have acknowledged that their jurisprudence “reflects a history of difficulty in dividing negligence into degrees” and that “it is doubtful that gross negligence has precisely the same meaning in each context.” See Fleetwood Homes of Florida, Inc. v. Reeves, 833 So.2d 857, 865-66 (Fla App 2d Dist 2002); see also LeMay v. Kondrk, 860 So.2d 1022, 1025 (Fla App 5th Dist 2003) (“Courts have encountered great difficulty in attempting to draw clear and distinct lines between the various grades of negligence). In Fleetwood Homes, the court observed that, in the context of addressing workers' compensation and in awarding punitive damages based on gross negligence, the relevant statute defines gross negligence to include “conduct [that] was so reckless or wanting in care that it constituted a conscious disregard or indifference to the . . . rights of person exposed to such conduct.” Id. at 867.[FN3]

[FN3]. The same definition for gross negligence was noted in In re Standard Jury Instructions-Civil Cases, (797 So.2d 1199 [2001] ), where the Florida Supreme Court authorized the publication of guidelines for jury instructions and model verdict forms with respect to the award of punitive damages in instances that involve intentional misconduct or grossly negligent conduct.

Bancroft Trusts' Lawyers Hold Key to Dow Jones

I can't imagine a more extreme example of trustee decision making under pressure-cooker conditions than the on-again-off-again negotiations for the sale Dow Jones & Co., which owns the Wall Street Journal.  As reported by the WSJ in Bancroft Trusts' Lawyers Hold Key to Dow Jones, at the center of that deal was a small group of lawyer-trustees:

The Bancroft family may own a controlling stake in Dow Jones & Co., but the final decision on whether to sell the publisher of The Wall Street Journal to Rupert Murdoch could well be made by a small circle of longtime family lawyers in downtown Boston.

Lawyers from Hemenway & Barnes sit at the center of dozens of overlapping trusts that hold power over most of the Bancrofts' 64% voting stake in the company .  .  .  . Those lawyers occupy two of the three trustee seats on a number of key trusts, with the third held by a family member. On one of the biggest trusts, lawyers from the firm are the only trustees. And the fact that the large Bancroft clan is divided over whether to sell further deepens the firm's influence.

"The vote really resides with them," says one family member who is leaning in favor of selling the company.

Risk management:

The best way to reduce the risk of getting sued as a trustee is to make sure the trust beneficiaries consent to your actions.  That seems to be what the trustees did in this case:

"There are 35 adult family members who have 35 points of view," Mr. Elefante said. "We've tried to be fair to all the family members by giving each of them all the information they need to make a good decision."

As the family's legal representative, Mr. Elefante likely would be reluctant to go against the family's wishes if a large portion of them oppose the deal. While trustees don't legally have to consult the beneficiaries of a trust before acting, ignoring their wishes might expose them to litigation. What's more, the Hemenway & Barnes trustees do not have to vote in concert. Mr. Elefante is expected to poll the family before deciding how the trusts would vote on a sale, a person close to him said.

Lesson learned -- plan ahead:

The earliest Bancroft trusts date back to the mid-1930s.  Back then no one could have possibly anticipated a sale of the WSJ in the year 2007 to a controversial media magnet from Australia.  Just like no one creating a trust today to hold a client's family business could possibly anticipate every contingency that trust will have to face in the decades (perhaps centuries - see here) that trust may be around for.

What you can do today is put in place a mechanism for trustee decision making that decreases the likelihood of future litigation while also making sure qualified trustees are at the helm when needed.  One way of achieving this balance is to design the trust so that an independent trustee, preferably a bank or trust company (see here for why), has ultimate decision making authority.  However, if trust beneficiaries feel their trustee isn't doing a good job or doesn't have their best interest at heart, sooner or later the parties will end up in court.  A way to avoid this type of showdown is to give the trust beneficiaries the power to hire and fire their corporate trustee at regular intervals.  Here's one way to do it:

  • Require a corporate trustee:

After my death or if my personal rights under this Trust Agreement are suspended, there must be at least one Corporate Trustee serving at all times.

  • Give trust beneficiaries periodic power to hire/fire corporate trustee:

Upon the third anniversary date of my death, and every three years thereafter, a majority in interest of the permissible current income beneficiaries most closely related to me who are then legally competent may remove any Corporate Trustee for any reason by giving 30 days’ written notice to that Trustee and to the permissible current income beneficiaries, including the natural or legal guardians of any beneficiaries who are then disabled.

  • Give senior generation greater voting power:

If there is ever a vacancy in the office of Trustee of any trust created in this Trust Agreement and no successor is appointed as provided in this instrument, a majority in interest of the permissible current income beneficiaries most closely related to me who are then legally competent (the “beneficiaries”) will nominate as a successor Trustee a Corporate Trustee as defined in this Trust Agreement. If the beneficiaries do not appoint a successor Trustee within a reasonable time, the terminating Trustee shall, or any beneficiary may, petition a court of competent jurisdiction to appoint a successor Corporate Trustee.

Should you consider a bank trust department for your estate planning?

My personal theory is that most probate litigation is NOT the result of intentional malfeasance, but rather the product of well-intentioned fiduciaries who are simply in over their heads (see here).  If the estate is complex or the beneficiaries are likely to be demanding (often legitimately so), then a professional trustee is almost always a bargain . . . especially compared to the cost of contested proceedings.

A recent article entitled Trust in your bank? reports on a study just published by the Spectrem Group, Chicago, that makes two principal points:

  • All probate or trust estates valued at over $5 million should be managed by a professional trustee.
  • More and more families are opting for non-bank professional trustees.

I wrote here about a previously published study by Tiburon Strategic Advisors that also reported on the trend away from banks to other providers for professional trustee services.

Here are a few excerpts from the linked-to story:

A recent report, published by the Spectrem Group, Chicago, shows that, ironically, just as the baby boomers need trust services more trust money is leaving banks. Personal trust assets held by U.S. banks fell 10% to $986.2 billion in 2005 from a peak of $1.1 trillion in 1999, it says.

Banks are losing ground due to the continued growth of nonbank trust services and the selection of family members as trustees, the report says. Plus, banks have been slow to change their services and the way they provide services.

The Spectrem Group report says that every ultra-high-net-worth household -- those with at least $5 million -- should have a trust. Yet only 52% of the 930,000 households nationwide that fall in that category do.

$111,000+ OOPS! for Wachovia Bank

Wachovia Bank, N.A. v. U.S., --- F.3d ----, 2006 WL 1912805 (11th Cir.(Fla.) Jul 13, 2006)

For trust and estates lawyers this case is a good example of how NOT keeping track of minor details -- like a client paying federal income tax on a tax-exempt charitable trust for 10 years -- can lead to lively appellate opinions (interesting for lawyers, probably less appreciated by clients paying the legal bills).

After 10 years of paying federal income tax for the George C. Nunamann Trust, a tax-exempt charitable remainder trust, someone at Wachovia apparently figured out this wasn't a good idea and kindly asked the IRS to refund $111,823 in gratuitously-paid income taxes (OOPS!!).  The IRS denied the refund request citing the three-year limitations period for tax refunds (26 U.S.C. 6511(a)).  Wachovia sued for the refund arguing that the general six-year statute of limitations period for claims against the U.S. applied (28 U.S.C. 2401(a)), and won that argument in a summary judgment ruling at the trial court level.  On appeal the 11th Circuit reversed in an opinion that starts off by quoting . . . The Beatles!

The Beatles' taxman told us what we'd see:
“There's one for you, nineteen for me.”
But if we really want some funds to free,
how soon does asking have to be?

Doggerel aside, the issue presented in this case is whether the statute of limitations period set forth in 26 U.S.C. § 6511(a) applies to claims for refunds made by those who have mistakenly filed a return and paid tax when they were not actually required to file a tax return. And as the Beatles probably would have guessed, the lamentable answer is yes.

I thought that was clever.  On a more substantive note, the 11th Circuit goes on to provide the following excellent discussion on how "context is king" in all matters involving statutory construction:

Well-established and soundly based rules of statutory construction require us to consider the provisions of § 6511(a), and its language, in context. The Supreme Court has described statutory construction as “a holistic endeavor.” Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 60, 125 S.Ct. 460, 466-67, 160 L.Ed.2d 389 (2004) (citations and quotation marks omitted). In doing so, the Court explained: “A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme-because the same terminology is used elsewhere in a context that makes its meaning clear, or because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.” Id. at 60, 125 S.Ct. at 467.

The Supreme Court has also warned us against slicing a single word from a sentence, mounting it on a definitional slide, and putting it under a microscope in an attempt to discern the meaning of an entire statutory provision: The definition of words in isolation ··· is not necessarily controlling in statutory construction. A word in a statute may or may not extend to the outer limits of its definitional possibilities. Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis.  Dolan v. U.S. Postal Serv., 546 U.S. ----, 126 S.Ct. 1252, 1257, 163 L.Ed.2d 1079 (2006). Characteristically, Holmes put it best when he explained in another tax case about ninety years ago that, “[a] word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.” Towne v. Eisner, 245 U.S. 418, 425, 38 S.Ct. 158, 159, 62 L.Ed. 372 (1918).

Corporate Trustee Sued for Failure to Diversify: Over $700,000 in Damages Alleged

Wood v. U.S. Bank, N.A. , 160 Ohio App.3d 831, 828 N.E.2d 1072, 2005-Ohio-2341 (Ohio App. 1 Dist. May 13, 2005)

Suppose you are a bank officer and one of your large shareholders wants to appoint you as corporate trustee of his trust and, because this shareholder became wealthy owning your bank’s stock, he wants to make sure his trust can continue holding shares of stock of your bank after his death.

[Q.] What issues should the bank be thinking about to make sure that it can both comply with the testator’s wishes and avoid getting sued in the process?

[A.] The bank’s fiduciary duty of loyalty (in connection with acting as trustee of a trust holding its own stock) and the bank’s fiduciary duty to diversify the trust’s assets (in connection with retaining a large block of the bank’s stock).

This case is a good example of what can go wrong if the bank fails to think about these fiduciary duties (and liabilities). Here the grantor created a trust worth over $8 million, naming Firstar Bank of Cincinnati its corporate trustee. Nearly 80% of the trust assets were in the bank’s own stock. Not surprisingly after the grantor’s death when the bank’s stock plunged in value from a high of $35 per share to a low of $16 per share, the trust’s beneficiaries sued the bank. As summarized by the appellate court, at trial the bank pointed to the following exculpatory language as part of its defense:

"The language of John's last trust was unambiguous. It granted Firstar the power to retain its own stock in the trust even though Firstar would ordinarily not have been permitted to hold its own stock. Specifically, Firstar had the power '[t]o retain any securities in the same form as when received, including shares of a corporate Trustee * * *, even though all of such securities are not of the class of investments a trustee may be permitted by law to make and to hold cash uninvested as they deem advisable or proper.'"

On appeal the Ohio appellate court ruled that although this exculpatory language might get the bank off the hook with respect to its duty of loyalty, it in no way relieved the bank of its duty to diversify. Here is how the appellate court explained its rationale:

"The retention clause merely served to circumvent the rule of undivided loyalty. The trust did not say anything about diversification. And the retention language smacked of the standard boilerplate that was intended merely to circumvent the rule of undivided loyalty-no more, no less. There were significant tax consequences that precluded John from diversifying by selling the Firstar stock during his lifetime, but that hurdle was removed upon his death. Had John wanted to eliminate Firstar's duty to diversify, he could simply have said so. He could have mentioned that duty in the retention clause. Or he could have included another clause specifically lessening the duty to diversify. But he did not. We hold that the language of a trust does not alter a trustee's duty to diversify unless the instrument creating the trust clearly indicates an intention to do so."

Lessons Learned:

Good drafting could have allowed the bank to both carry out the grantor’s wishes and avoid getting sued. The best way to make this point is to actually look at examples of proper trust provisions for this type of scenario. With respect to authorizing the bank to hold its own stock in trust, here is a sample clause (I’ve italicized the key terms):

Waiver of Duty of Loyalty:

The Trustee is authorized to invest in assets, securities, or interests in securities of any nature, including (without limit) commodities, options, futures, precious metals, currencies, and in domestic and foreign markets and in mutual or investment funds, including funds for which the Trustee or any affiliate performs services for additional fees, whether as custodian, transfer agent, investment advisor or otherwise, or in securities distributed, underwritten, or issued by the Trustee or by syndicates of which it is a member; to trade on credit or margin accounts (whether secured or unsecured); and to pledge assets of the Trust Estate for that purpose.

With respect to authorizing the bank to retain a highly concentrated stock position, in other words relieving the bank of its duty to diversify, here is a sample clause (I’ve italicized the key terms):

Waiver of Duty to Diversify:

I authorize the Trustee to retain the assets that it receives, including shares of stock or other interests in XYZ Corp., or its successors in interest, or any other company or entity carrying on or directly or indirectly controlling the whole or any part of its present business (collectively referred to as "XYZ Corp."), for as long as the Trustee deems best, and to dispose of those assets when it deems advisable. I prefer that the Trustee not sell shares of stock or other interests in XYZ Corp. because I believe that the best interests of the beneficiaries will be served by retention of those interests in the Trust’s portfolio. I intentionally excuse the Trustee from the duty to diversify investments by the sale or other disposition of interests in XYZ Corp. that ordinarily would apply under the prudent investor rule, and I direct that the Trustee not be held liable for any loss or risk (even so-called "uncompensated risk") incurred as a result of this failure to diversify. I realize, however, that circumstances may change, and that the Trustee may determine it to be advisable to sell some or all of the interests in XYZ Corp., and nothing in this paragraph will be interpreted in any manner to limit the Trustee’s authority to do so.

Corporate Trustee under Fire: Failure to Diversify J.M. Smucker Company Stock Holdings

This recent failure-to-diversify case out of Ohio underscores the trustee-liability issues I wrote about here regarding the recent appellate-court reversal of a $24 million judgment against Chase Manhattan in New York. In both cases the bank's liability (or lack thereof) for losses arising from the decision to hold family stock in trust for decades (versus selling the family stock and diversifying the trust's stock portfolio) hinged on express exculpatory language incorporated into the governing trust agreement itself.

In Natl. City Bank v. Noble, 2005 WL 3315034, 2005-Ohio-6484 (Ohio App. 8 Dist. Dec 08, 2005), the issue before the court was whether the corporate trustee, National City Bank ("NCB"), was liable for the alleged 52% drop in the trust's portfolio value. The trust in question was created in 1965 by Welker Smucker, son of the founder of the J.M. Smucker Company. Among the assets originally funding the trust were over 1,000 shares of J.M. Smucker Company common stock. The following exculpatory language was incorporated into the trust agreement:

"2. The Trustees are empowered to retain as an investment, without liability for depreciation in value, any part or all of any securities * * * from time to time hereafter acquired by the Trustees as a gift, devise or bequest from the Grantor or any other person, * * * even though such property be of a kind not ordinarily deemed suitable for trust investment and even though its retention may result in a large part or all of the trust property's being invested in assets of the same character or securities of a single corporation. * * *. Without limitation upon the generality of the foregoing, the Trustees are expressly empowered to retain as an investment, without liability for depreciation in value, any and all securities issued by The J.M. Smucker Company, however and whenever acquired, irrespective of the proportion of the trust properly invested therein * * *.

The Trustees are empowered to invest and reinvest any part or all of the trust property * * * in such securities * * * as they may select, irrespective of any limitation prescribed by law or custom upon the investments of trustees and even though the trust property may be entirely invested in common stocks or other equities * * *." Trust Agreement, at Section E(2)-(3).

Based on this language, the court ruled that NCB could not be held liable for any alleged losses resulting from the failure to diversify the trust's portfolio.

The language contained in Welker Smucker's Trust Agreement is clear on its face that the trustees could retain investments without liability or depreciation. The trust went even one step further to insulate NCB as the corporate trustee, providing specifically that it had no duty to review or to make recommendations without the specific request of the individual trustee.

Lessons Learned:

In an excellent essay published online here by BNA, the trustee-liability issues alluded to above are discussed in great detail. The introductory paragraphs to the linked-to essay sum up nicely the lessons to be learned from the Smucker and Kodak failure-to-diversify cases:

Investment diversification, always important for trustees, has in the last ten years become more important than ever. The Restatement (Third) of Trusts - Prudent Investor ("Restatement") and the Uniform Prudent Investor Act have made clear that a trustee's duty with respect to trust investments is to view those investments as a portfolio (rather than viewing each asset in isolation), and to diversify that portfolio. However, these innovations raise a question: do trustees now have an absolute duty to diversify trust investments?

To spoil the ending of this tale, the answer, of course, is no. The Prudent Investor Act states explicitly that a trustee is to diversify investments unless there is a prudent reason not to. The factors that might convince a trustee not to diversify can include language in the trust agreement directing the trustee not to do so, the particular situations of beneficiaries or the tax cost of selling an asset that dominates the portfolio.

Nevertheless, case law indicates that the duty to diversify may, in certain circumstances, be given greater weight than the trustee or her advisors might expect. In light of this judicial gloss, a trustee should assume, almost regardless of the circumstances, that she has the duty to diversify, and act cautiously when deciding not to do so. Further, lawyers drafting trust agreements should take extra care when drafting instruments for grantors who want trustees not to diversify.

Corporate Trustee under Fire: Failure to Diversify Kodak Stock Holdings

$24,076,937.31 Judgment v. Chase Manhattan Bank Reversed on Appeal

It is not unusual for the family wealth to be the product of one or two extremely successful investments or stock holdings. In those cases any testamentary trusts created by the decedent will obviously be funded with large blocks of one or two very valuable stock holdings. Not surprisingly the family will probably want the trustee to hold on to the large blocks of stock that made them all wealthy to begin with.

As Chase Manhattan Bank learned in this case, the family's desire to remain concentrated in one or two stock holdings may conflict directly with the trustee's duty to diversify the trust fund's stock portfolio. In Florida, the duty to diversify is required under Florida's prudent investor statute. See F.S. § 518.11(1)(c); see also F.S. § 737.302.

The duty to diversify may, however, be excused by the person creating the trust. It is exactly this type of direction that got Chase Manhattan off the hook for a $24+ million judgment! Here is the language focused on by the New York appellate court in In re Chase Manhattan Bank, 809 N.Y.S.2d 360 (N.Y.A.D. 4 Dept. Feb 03, 2006):

The trust was funded with a concentration of Kodak stock. Decedent's will provided that "[i]t is my desire and hope that said stock will be held by my said Executors and by my said Trustee to be distributed to the ultimate beneficiaries under this Will, and neither my Executors nor my said Trustee shall dispose of such stock for the purpose of diversification of investment and neither they [n]or it shall be held liable for any diminution in the value of such stock." Decedent's will further provided that "[t]he foregoing ··· shall not prevent my said Executors or my said Trustee from disposing of all or part of the stock of [Kodak] in case there shall be some compelling reason other than diversification of investment for doing so."

Lesson Learned:

Deep-pocket trustees (read: corporate trustees) need to ensure proper language is included in the trusts they administer if the family's desire is to hold on to one or two key stock holdings. The provision I include in my documents is the following:

I authorize the Trustee to retain the assets that it receives, including shares of stock or other interests in [XYZ STOCK], or its successors in interest, or any other company or entity carrying on or directly or indirectly controlling the whole or any part of its present business (collectively referred to as "XYZ STOCK"), for as long as the Trustee deems best, and to dispose of those assets when it deems advisable. I prefer that the Trustee not sell shares of stock or other interests in XYZ STOCK because I believe that the best interests of the beneficiaries will be served by retention of those interests in the Trust's portfolio. I intentionally excuse the Trustee from the duty to diversify investments by the sale or other disposition of interests in XYZ STOCK that ordinarily would apply under the prudent investor rule, and I direct that the Trustee not be held liable for any loss or risk (even so-called "uncompensated risk") incurred as a result of this failure to diversify. I realize, however, that circumstances may change, and that the Trustee may determine it to be advisable to sell some or all of the interests in XYZ STOCK, and nothing in this paragraph will be interpreted in any manner to limit the Trustee's authority to do so.

Trustees Targets of Multimillion Dollar Lawsuits

Recent newspaper stories reporting on multimillion dollar lawsuits involving two of the wealthiest families in the United States, the Pritzkers (reported here by the New York Times) and the duPonts (reported here by the Daily News), are interesting for many reasons.

The angle I find most interesting is to ask myself what could have been done to avoid litigation in the first place. Both cases seem to revolve around disputes over the administration of family trust funds (versus a zero-sum dispute over a set pot of money by conflicting parties). Without knowing more about these cases, I'd guess the manner in which the subject trust agreements were drafted is in all likelihood at least partly to blame for the current litigation.

Trust documents that may (either initially or over time) govern huge sums of money and span several family generations must be drafted with (1) enough specificity to accomplish the original founder's goals while (2) also allowing for enough flexibility to work through unforseen future contingencies - without having to go to court.

A poorly drafted trust agreement gives the parties only two choices: do nothing or sue. A properly drafted trust agreement provides multiple options for conflict resolution/avoidance between those two extremes.

As I previously wrote here, the amount of wealth flowing into multi-generational trusts or "dynasty trusts" is skyrocketing (current estimates are in the $100 billion range). In the absence of carefully drafted trust agreements, more trust litigation of the type reported above seems inevitable.

  • The following are excerpts from the New York Times article on the Pritzker trust litigation:
The Pritzker clan, [Chicago's] first family of fortune and philanthropy, has been riven by accusations of betrayal, self-dealing and conflicts of interests, according to court records unsealed here Tuesday.

The revelations come halfway through a secretive decade-long process in which the Pritzkers must untangle and liquidate huge holdings, including their signature Hyatt hotel chain and the 60 companies in the $6 billion Marmon Group, in order to divide the assets by 2011. The family fought fiercely to keep the records sealed - and the schism secret - but The Chicago Tribune successfully sued to bring them to public light.

The current fight began in July 2000, months after Jay Pritzker's funeral, when six of the cousins - Dan, James, J. B., John, Linda and Tony - wrote the others questioning "whether the structure of our family enterprise needs to be updated." Quoting "Great Grampa Nicholas," the cousins worried that as the growing clan developed divergent interests, members would "feel unfairly treated, and that strains and tensions may develop among people who should be a loving family."

Their letter said information about the family's fortune was too tightly held and asked for more independence in making charitable gifts. "We do not want a divisive process that leaves hurt feelings," it said.

But when the requests were refused, the cousins hired lawyers, and soon conference rooms were filled with documents. They settled about 18 months later, devising a 10-year plan, and went to court only for a limited proceeding to make the agreement binding on future generations.

(Emphasis added.)

  • The following are excerpts from the Daily News article on the duPont trust litigation:
He's a direct descendant of one of America's wealthiest families, but Alexis du Pont de Bie Sr. says he's now "literally destitute and homeless" - at least by du Pont standards.

He grew up in a house with 20 bedrooms and 13 bathrooms, set on a 260-acre estate in Delaware, but now he sleeps on the sofas of kindhearted friends.

He once had a trust fund worth $7 million, but now it's worth only $2.7 million - trimming his monthly allowance to $3,000.

De Bie is suing two management companies, Tredegar Trust Co. and Middleburg Financial Corp., both of Virginia, for mismanaging the trust fund, forcing him to live on a working-class salary.

Neither Tredegar nor Middleburg returned calls for comment. The suit seeks $60 million - $10 million based on what the trust would be worth had it been properly invested and $50 million in punitive damages. It also seeks to have a new trustee appointed.

(Emphasis added.)

$1.1 Million Judgment Against Wachovia Bank of Georgia for Exposing Assets of NRA to U.S. Estate Tax Upheld on Appeal

Iraqi Heir Loses Half of Estate, Blames Bank

After years of litigation, plus an appeal to Georgia's Supreme Court (see Namik v. Wachovia Bank of Ga., 612 S.E.2d 270 (Ga. S. Ct. 2005), the Court of Appeals in Georgia recently upheld a $1.1 million judgment against Wachovia Bank of Georgia for failing to avoid estate taxes on trust assets held for a non-resident-alien ("NRA") (see Wachovia Bank of Ga. v. Namik, 620 S.E.2d 470 (Ga. Ct. App. August 25, 2005).

Although the latest appeal in this case was published in August of 2005, the trial took place in 2002. Here's an excerpt from this 2003 newspaper story regarding the facts of the case:

The case tests to what extent a bank can be held responsible for investment decisions that expose an estate to higher taxes. The issue is clouded, however, by the bank's unsuccessful efforts to contact the client, who died in an Iraqi prison.

Issam Namik, son of retired Iraqi general Ibrahim Namik Ali, claims Wachovia mismanaged a living trust his father established with the bank in 1989. The bank, he claims, failed to follow Ali's instructions and unnecessarily exposed the $3 million estate to $1.4 million in estate taxes. In December 2002, a Fulton County probate judge ordered the bank to pay $1.1 million to the estate.

According to documents in the trial and appeals courts, Ali came to Atlanta in the spring of 1989 to visit his son. While he was here, he set up a living trust at Wachovia. Ali bought three certificates of deposit, two for $350,000 and one for $2.65 million.

The bank sent Ali to trust officer Thomas Slaughter, who set up the revocable living trust with the understanding that when the largest CD matured, the proceeds would fund the trust. Ali told the bank he wanted the funds invested only in U.S. government backed investments, and Slaughter set down Ali's instructions in a memo, according to court documents.

The largest CD matured in September 1989, with $2,780,380 rolling into Ali's trust. A new trust officer tried repeatedly to contact Ali, using the phone number and addresses Ali had provided earlier that year, but failed. Namik claimed he ordered the bank to stop trying to contact his father because Ali had been arrested on his return to Iraq and was in danger.

Meanwhile, in order to avoid what it thought would be a 30 percent income tax withholding requirement, Wachovia parked the funds from the Ali trust in a tax-free Fidelity money market account while awaiting further instructions from Ali.

Those instructions never came. Ali, arrested immediately and without explanation upon his return to Iraq, died in custody in May 1990. Namik didn't learn of his father's death until 1992 and did not inform the bank until 1994. Wachovia didn't receive a death certificate until 1995, and that's when the legal struggle began. (Emphasis added.)

Lesson Learned:

U.S. situs assets held by non-resident-aliens ("NRAs") are subject to U.S. estate taxes (see IRC § 2101 and IRC § 2106). Avoiding this tax is so simple U.S. corporate trustees run the risk of getting sued when beneficiaries learn that dad's savings account just got chopped in half to pay easily avoidable U.S. estate taxes (which is what happened to Wachovia in this case). In this case Wachovia learned that short-term U.S. treasury bills (under 183 days) are subject to U.S. estate tax, while long-term U.S. treasury bills are not (see IRS Technical Advice Memorandum 9422001). Any corporate trustee that services NRA clients owes it to itself (and its shareholders) to know these tax situs rules cold.