In 1976, the nation’s bicentennial, Villanova’s Joan and Standish Smith seemingly hit the All-American jackpot. After taxes, Joan inherited $1.5 million in stock-made money from her mother’s side. The pair immediately toured Europe, moving from country to country for a month and spending almost $8,000 before calling the bank to ask for more money.
That’s when they got the bad news: The inheritance was locked in a trust fund. “The bank ran out of our money,” Standish Smith says. “We had to take out a loan on our monthly dole-out just to get home.”
Still, news of the trust fund afforded the couple a windfall opportunity. Smith could retire. They could move out of their apartment and into a posh, secluded home in Villanova.
It’s what the Smiths have learned since then that’s disturbing. Old money held bondage in old trusts can frustrate and even debilitate beneficiaries. Once the settlor dies, it’s an uphill battle to amend the administration of that trust. This handcuffed financial existence irked Smith enough to form HEIRS, a nonprofit organization that’s grown to 2,300 beneficiaries nationwide, all dedicated to trust and estate reform. Solutions for reform—or even the need for it—differ. But one thing’s for sure: Generally, those with trusts misunderstand their rights, and are equally misunderstood.
“It’s misconstrued that anyone with a trust is a multi-zillionaire, but that’s not the case,” says Robert Whitman, a senior law professor at the University of Connecticut.
Whitman has been on a 50-year quest to balance trust and estate law with fiduciary accounting responsibility. A reporter for the National Fiduciary Accounting Project and co-author of the Fiduciary Accounting and Trust Administration Guide, he wants to turn a “delicate, complex” system into a fair one.
In general, trusts do an “incredible amount of damage to beneficiaries,” Whitman says. “The worst thing you can say to a person is: ‘Don’t worry, you’ll
never have to work again.’”
Drug and alcohol abuse is common among beneficiaries, as are mental disorders. “There’s something incredibly healthy about getting up in the morning and earning a living,” Whitman says. “So if you’re responsible, why would you bother relying on a trust? Go out and work! You’re out of your mind not to go work.”
On the affluent Main Line, reliance on trusts and the tug-of-war over the pent-up money, Whitman says, has resulted in a surprising number of “ineffective people who really have to fight to make a normal family life when there’s seemingly a lot of money.” When they’re younger, “trust fund babies” are “punished at school, laughed at and made fun of.”
Families with trusts often feel they need to live in “big houses or live a certain lifestyle,” he adds. But as the economy grows iffier, “you can’t support a life on one trust unless you’re talking about a trust of $100 million—and most are not like that.”
The Smiths’ $1.5 million has since grown into a multimillion-dollar account. So, is Smith—who, like his wife, is 76—a spoiled brat? Maybe. Does he have a point? Absolutely. Is he screaming for reform? You bet.
Smith fully realizes the general public’s likely response: Who are you to complain? You’re not doing anything to earn that money! “Even my neighbors have asked, ‘What do you do?’” Smith says. “Well, I don’t do anything. I run HEIRS.”
If anything, his story is a classic example of fighting city hall—the banks and all their investors, accountants and lawyers.
“Initially, I had no idea what a trust was,” Smith says. “I knew they controlled family money and that the bank had us for fancy lunches. But when I found out the extent of its control, I resented it. We need a system with checks and balances, instead of one with undiluted discretion.”
Still, with millions socked away, why worry about it?
“Why?” poses Smith. “Because maybe the bank thinks the same thing.”
At one time, Smith worked as a consultant on statistical analysis and human factors research for high-profile companies. It was Burroughs in the 1950s. Later, he went to the Franklin Institute and evaluated air traffic control procedures and equipment. In the early days of moon exploration at General Electric, he studied whether or not an astronaut could operate a portable rocket after ejecting from a troubled space vehicle in a cocoon-like capsule. “I was talking with all the astronauts,” Smith says. “It was pretty heady stuff.”
After that, it was on to deep-sea diving robotics to service wellheads in the Santa Barbara Channel. He restored classic cars for a time.
For most of his life, Smith enjoyed an exciting videogame-type existence. Now he’s living in a pinball machine.
“Beneficiaries need to know the rules of the game,” he says. “It is a game, but most beneficiaries—or executors of an estate—don’t have a clue. They’re often left saying, ‘But I thought this was our family money.’”
Typically, the trust game is about control. “[Banks] move money in and out, knowing you can’t fight back,” Smith says. “You can in theory, but you’re told every day that they’re doing the right thing. Instead, they have monopolistic power and collusive relationships with the lawyers.”
Of course, the bank’s opinion differs. Locally, in the mid-1990s, Vanguard first began engaging in trusts in response to inquiries and the need to appeal to high-net-worth clients. The Valley Forge-based financial giant employs in excess of 100 employees in its trust-related business.
“Each client has unique needs, so we work with each the best we can,” says Martin Riehl, principal of Vanguard’s Asset Management Services. “Our upfront review fits with Vanguard’s overall long-term philosophy, so we’re always confident it’ll be a good relationship.”
The Smiths’ trust is handled by the Philadelphia office of the Boston-based BNY Mellon Wealth Management. Initially, the couple was entitled only to income. For years, they never even asked about principal. Meanwhile, without their input, their money was invested according to industry standards—generally 60 percent in bonds and 40 percent in equities. Smith calls this strategy “crazy” if you’re looking for maximum profit. Bonds, he says, don’t appreciate over the long term. “I’d invest half the portfolio in solar energy right now, but they want to play a different game,” says Smith.
The Smiths’ portfolio is divided into 27 sectors. Why not fewer with more promise? “So far, I haven’t been able to convince them,” Smith says. “They’re not proactive.”
There is one big advantage to an over-diversified portfolio. It limits risk. If an investment goes sour, there’s money elsewhere. But such a portfolio isn’t likely to perform better than a simple index fund, which is much less expensive than an actively managed portfolio.
At BNY Mellon Wealth Management, a recent survey administered by an independent firm revealed a 92-percent satisfaction rate and a 97-percent retention rate among wealth management clients.
“As trustees, we’re obligated by the law, our fiduciary responsibilities and by the clients themselves to follow the parameters of the trust,” says BNY Mellon spokesperson Susan Rivers. “We’re expected to manage the fund so it pays out to generations today and also provides for future generations.”
What really gets Smith about the banks is that—instead of putting everything on the table, explaining the division of assets and letting the beneficiary decide—they operate without input. And there’s such little course of recall in an old trust.
So beneficiaries hire litigators—a “toxic, last-resort” decision, according to Irina Shea, a former estate attorney and trust officer who now privately mediates trust and estate disputes for beneficiaries. Mediation, she says, is a salvo between “frustration and litigation.”
“It’ll cost you twice,” Smith says about hiring an attorney. “You’ll be paying your lawyer while you educate him. Then the bank’s attorney will be paid with money from the trust—and it may be deducted before you even get to court. There, the courts favor the banks. So if you decide to litigate, you’re dead in the water before you start.”
Robert Whitman, who provides expert testimony for both trusts and trustees, spends more time with the “powerless,” those beneficiaries who can’t afford a lawyer or can’t find one to oppose the banks’ lawyers. “You can be frozen out,” he says.
So what do you do when the others have all the chips? The first, and often last, stop is the trust “instrument” (or document). It’s where trustees are named, and the rules for the distribution of income and principal are established. It may also detail when or why the trust can be terminated. From the start, a beneficiary is often upset because the trust’s creator didn’t will the money outright. “No beneficiary wants the money in a trust,” Smith says.
Some create trusts for the long-term care of younger or disabled relatives, where the rationale for transferring power to a trustee is most evident. But trusts can have multiple variables. There are primary and secondary income beneficiaries. Then there are remainders (generally children and grandchildren who take over the assets at termination). Regardless, the bank’s answer is always, “Well this is the way the settlor wanted it”—“even if the settlor has been dead for 50 years,” says Smith.
For a settlor, establishing a trust keeps money within bloodlines (and away from those who marry in), protects it from creditors and predators, and—to some degree—shelters it from estate taxes. A trust also prevents a spendthrift heir from wasting the pot of gold.
“A trust is a living document, a gift of safety and security, a protected place,” Shea says. “But it wraps up the money, and you can’t easily get to it, so it leaves a beneficiary asking, ‘Why didn’t [the settlor] trust me?’”
In addition, times have changed. The relationship with the “corner bank” has evaporated with each buyout, merger and consolidation. This has “shaken the system,” Whitman says. “Now you get an ‘800’ number, and you’re lucky if, when you call, you get something other than a recording.”
Years ago, one trust officer would handle 100-150 clients. Now, to keep costs down, that officer might handle 300-500 smaller net-worth clients. Generally, the smaller the trust, the more inundated the officer—and the angrier the beneficiary. Plus, baby-boomer beneficiaries want more control. “This sets the stage for conflict,” Shea says.
Society has changed, too. On the Main Line, the wealthiest used to talk to one other. That kept the banks in line. Now, society is more self-serving, and the banks are more defensive because of technology (and the access it provides beneficiaries) and global competition for even the most local business. With wealthier people living longer lives, banks are wise to what could be a boon in trust business, but international corporate competition for the best trusts ($10 million or more) could leave lesser beneficiaries out in the cold.
“It’s possible today to be a poor millionaire at a private bank,” Shea says. “And with old trusts, you won’t see anything in society that’s so restrictive. It’s like an arranged marriage without the possibility of divorce.”
Of late, it has become increasingly common in newer instruments to give dissatisfied beneficiaries the right to remove a trustee and replace it with another. “If I don’t have to stay with you for the rest of my life, will you listen to what I have to say?” Smith asks rhetorically.
In the mid-1990s, he lobbied for three years to have state laws adopted that would allow beneficiaries to change trust officers without termination fees or the costs of a court accounting. Smith had 18 sponsors, including key endorsees like state Sen. Stewart Greenleaf. Smith lobbied against the powerful Pennsylvania Bankers Association (PBA), and in the end, the HEIRS bill didn’t make it out of committee.
Today, Smith acknowledges his mistakes. Aggressively, even arrogantly, he wrote the PBA a letter that he copied to every legislative member, crucifying the organization. The letter backfired. “I used poor judgment,” he says now.
Then he told Greenleaf that he could single-handedly push the bill out of committee. “He told me to my face it wouldn’t go because the banks don’t want it,” Smith recalls. “I told him to his face that he was corrupt. It goes to show that you can have the best consumer bill on the table, but if money is involved …”
Now, the evolution of the “trustee removable clause” is as close to what the legislature could’ve provided en masse. “We’re still locked in [with an old trust],” Smith says. “We live with the idea that [the bank] can invade our trust for fees or bump them up. That bill would have been a revolution. It would’ve transformed the industry.”
Whitman argues that legislation is not always the solution. “Legislation cannot replace excellent drafting, common sense and experience,” he says.
Whitman is involved with a consortium of seven others in developing language for uniform probate code. His solution suggests an early start on fiduciary accounting. Already, he’s noticing a change in attitude. Trust companies have to redesign and keep up. As such, trust officers are better educated, and trained in customer relations.
“It’s totally taking hold,” Whitman pledges. “I’m very optimistic, but this doesn’t solve the problems of the ones who don’t want to work, are alcoholics or just have to have a jet plane because others they know do.”
HEIRS loses money on an annual basis. Some years, Smith has spent $15,000 to administer it. If nothing else, he admits, it gives him a reason to exist. “I mean, if you live on a trust, what else do you do?” he asks. “I still have to face up to the neighbors, so at least I’ve made a name for myself.”
His nonprofit is unique. In fact, he says, it’s the only one of its kind in the country. For a time, another—Heirs & Beneficiaries—was the work of St. Davids’ Ted Pollard, president of the Radnor Historical Society. With Smith, Pollard attended a meeting of 15 beneficiaries in Devon in 1991 that hatched HEIRS. Soon thereafter, the two organizers filed class-action lawsuits over administrative fees against both Mellon Bank and Fidelity Bank. Initially, they won what would have amounted to a $100 million settlement from Mellon before the verdict was reversed on appeal. Pollard then broke away from HEIRS to form Heirs & Beneficiaries.
“If the verdict had stuck, all banks would have been in trouble,” Pollard says. “They all do the same thing, but they all operate with impunity.”
Now, at 63, Pollard struggles to live on four trusts (two from the ’60s and two from the ’80s) created by his maternal grandparents. Without removable clauses and aggressive management, the funds have reaped “120th or 125th” of what he could now have. Couple that with a divorce, and Pollard says he’s been “starving to death for the last 15 years.”
“I have old cars,” he says. “I’ve been sued several times. I get behind on the payment of bills. I’m unable to help my children or grandchildren like I should. Consequently, I’m moving to Mexico so I can afford to live. It’s been very, very painful for me. Trusts have changed the whole direction of my life. Can you imagine having to live on money fixed in the ’60s?”
In starting and disbanding Heirs & Beneficiaries, Pollard admits he was looking for a quick fix. But after the Mellon settlement was reversed, the fight grew too frustrating too soon. “It just seemed that our proactive efforts were all but decimated,” he says. “Shame on the banks. We’re just captivated common slaves. The banks don’t have to give us service, but they can benefit from us. That’s wrong, and it’s patently un-American. Maybe the banks will wake up one day without any customers at all.”
Another beneficiary, a 30-year widow from Bala Cynwyd who requested anonymity, says BNY Mellon “rapes” the trust her husband set up by dipping into principal for service fees. Early on, she used it to pay for her sons’ schooling at Episcopal Academy. They went on to earn academic scholarships to college, and both are now lawyers.
“Our forefathers trusted banks,” she says. “Back then, banks took care of you and kept you in their best interest. Today, it’s the opposite. They’re not working for you; they’re working for themselves.”
Whitman says beneficiaries remain unorganized—and unhappy—because they don’t understand the system. “It’s like a stranger visiting from outer space saying he doesn’t understand why automobiles don’t fly,” he says. “They say, ‘Oh my God, I think it should fly.’ Now, gas is [more expensive], and many beneficiaries expect someone will take care of that for them, too. Still, the fiduciary is obligated to be reasonable, and if the two sides can’t agree and sign on a dotted line, then a resolution officer should be called in.”
For those with old trusts, Shea’s website, IrinaShea.com, suggests mediation strategy. And her paid membership site, BeneficiaryForum.com, provides a discussion forum. “It’s HEIRS.net come alive in Web 2.0,” she says.
More fiduciaries have begun catering to beneficiaries. “[But] don’t expect [the bank] to do it for free, because it’s a profit-making organization,” says Whitman. “And don’t expect that, if you ask for money, they can just give it to you.”
In general, Whitman contends, there isn’t much outcry. Not that the system can’t be better, but beneficiaries aren’t all rising up and revolting. “Those who continue to have a hard time just don’t understand,” he says. “They think the car should fly.”
It’s never easy fighting city hall. “I started in 1991, and I’m still learning,” Smith admits. “I thought that, with HEIRS, I’d have a lot of power, but that hasn’t worked out.”
When it comes to mediation, Smith says, “as long as one side of the table has all the power, it’s just a goodwill gesture.”
Smith wants to push for a federal removable clause like the one he advocated at the state level. And as for the increase in trustee removable clauses, Smith points out, “the bank will force you to show a burden. It’s still a commercial relationship, and I’m not comfortable knowing those same people are holding my financial purse strings.”
After five years of pleas and $14,000 in legal fees, the Smiths have yet to convince their bank to increase their monthly dole-out from 4 percent (of the trust’s annually determined value) to 5. Meanwhile, BNY Mellon has assured Smith that he’ll like his new portfolio.
“The jury is still out on that,” he says. “I offered them ideas, but they don’t want to hear any. It becomes an ego thing, and we’re never on the same page. If we need a special dispensation, they’ll work with us. But mostly, they want us to know that they’re in the driver’s seat.”
In the end, Smith says, the simplest way to get money to your heirs is through gifting. IRS rules currently allow for $12,000 in gifts to any individual per year. Smith also has allowed each of his two sons to be his own trustee and sole beneficiary of his own trust. Their children are remainders.
“If they take principal out, then they must document it to assure that the money is used for medical, educational or general support, or face the possibility of downstream taxes,” Smith says. “If the correct wording is in the trust instrument, no one can tax it when it’s distributed to the remainders. Having an income beneficiary serve as trustee of his own trust saves fees, time and trouble.”
So where does that leave the bank?
“Out of the picture,” Smith says.