Litigation Involving Bank Trust Departments, Wealth and Investment Management Nationwide Industry Standards

Bank trust departments have an extremely difficult and sometimes unbelievable job in managing trusts and estates. If you think that these laid-back, soft spoken pinstriped warriors have an easy and cushy job, just consider these varied situations (among many, many others) in which I was personally involved as a trust and estate administrator:

● Executor of the estate of a busy railroad man who, it turns out, had a wife and family at one end of the line he worked, a wife and family at the other end of the line, and a wife and family in the middle!

● Executor of the estate of a man who owned

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what was claimed to be the only crab meat packing plant in the world.

● Executor of the estate of a man who was the largest land owner in the state.

● Executor of the estate of a man who owned such a large block of a publicly traded corporation’s stock that we had to file an SEC notice in order to sell it (SEC Rule 144 stock).

● Administrator of estates and trusts that contained commercial real estate developments under construction and in various stages of completion.

● Administrator of an estate that owned a cemetery where occasionally on short notice I had to drive out there with a hatchet and pound into the ground stakes that said, for example, “Jones head” and “Jones foot.”

● Negotiate oil leases with major oil companies.

● Negotiate commercial, multifamily, retail, office, warehouse, agricultural, and other property leases and sales.

● As an executor and trustee, referee intense bickering among family members (and of course, get blamed by all of them).

● As a trust and estate administrator, get involved in just about every type of business you can imagine that was previously owned by the decedent. Some examples are a beer distributorship, a large rice company, huge tracts of timberland, and don’t forget the crab plant.

● Sell 1,500 gallons of Scotch whiskey held by one decedent. (No surprise, he drank himself to death.)

● Trust administrator for a personal trust that included troublesome assets that the owner simply did not want to manage, such as borderline rental properties and a portfolio of what today would be called “subprime” mortgage loans, including one to a chronically seriously delinquent lady borrower who once wrote to me confessing, “Dear Mr. Coker, I realize that my payments is in the rear.”

Here are some anecdotal comments on a broad range of issues that I have encountered in working as a trust and estate administrator, wealth manager, and expert witness consultant:

Trust and Estate Structure and Strategy

● All of the Customer Objective Questionnaire forms since the creation of the trust should be on hand for review when necessary and for reference when questions arise regarding past investment actions.

● Especially when a bank is involved early on in the planning of an estate or trust, it is my opinion that there is no excuse for fundamental errors of structuring a client’s financial matters using taxable revocable trusts as opposed to irrevocable trusts that would be free of estate taxes, and would allow life insurance proceeds to flow directly into more tax favorable life insurance trusts rather than directly into the estate where they would be taxable. It is foreseeable that a basic structuring mistake such as this will result in an increase in the taxes that have to be paid, and in a reduction in the corpus that is available to be distributed to the beneficiaries.

● There is no excuse for an Executor or Trustee to fail to make charitable distributions in a timely manner as directed by the decedent. Any additional taxes or other negative economic results from the bank’s failure to make these distributions should not be charged against the corpus of the estate, but rather should be absorbed by the bank.

Management and Operation of the Trust or Estate

● An executor or trustee of a trust has a fiduciary duty to both the creator of the account and to the beneficiaries to manage with care and prudence the assets that were entrusted to it.

● A bank trust department should always have policy and procedure manuals in place that can provide direction to its employees. These manuals should tell employees how to accomplish most tasks and tell them where to find any additional advice or assistance they need in performing their job.

● Reviews of account investment activity and overall financial performance of a trust or estate should be conducted at least quarterly if not monthly. An annual account review to gauge progress toward achieving the financial objectives for the account are too infrequent to be effective.

● When a bank is not an executor of trustee but simply opens a checking account for an estate or trust, the bank should be aware of any unusual activities such as, for example, a discernible suspicious pattern of checks to a particular party. I saw one checking account opened by a private attorney serving as the trustee of a trust, and each month he wrote to himself a suspiciously large number of checks in round dollar amounts of $200, $300, $400 etc. Since the bank knew that this was a trustee’s account for two elderly ladies, and attorneys are not usually paid in small round amounts and several times each month, this pattern should have come to the attention of the bank, and prompted an inquiry, but it did not.

● It is a simple fact, and understandable, that banks in smaller towns typically have more knowledge of their customers than do banks in larger areas.

● In many cases, the observance of a particular pattern of unusual activity in a trustee’s or executor’s account should warrant a telephone call or other appropriate inquiry to determine the nature of the activity, and may very well prevent or drastically reduce losses due to fraud.

● A template for an overview of an estate’s or trust’s financial performance can be stated as:
The trust started operating in 1988 with a beginning balance (after estate taxes and some expenses) of $245,931. It operated nineteen years, distributed to the beneficiary income payments of approximately $369,800, and distributed fees to the Bank Trust Department of approximately $31,244 which is equivalent to 8.4% of the income distributed, and closed in 2008 with a final balance of $209,815.

● One of the skills that clients setting up estates and trusts expect a bank trust department to provide is some reasonable degree of expertise in investments, as demonstrated by their range and quality of potential investments considered for the account. Accordingly, simply “investing” an estate’s or trust’s funds in bank deposits can cause a bank trust department to be criticized, not only for self-dealing that advances the interests of the bank over those of the client by increasing the bank’s deposit base and supplying the bank with funds that can be invested for a profit, but also because bank deposits traditionally earn very low yields, and they do not offer any chance for a profit beyond the return of the principal invested and the interest earned on that principal. No gain is possible on the principal amount invested in bank deposits, as would be possible with equity investments. Clients can also charge that these “investments” were nothing more than bank deposits which could have been made by any customer without the assistance of the bank trust department.

● Examples of alternative investments that typically would produce yields higher than bank deposits include solid, high-yielding utilities and corporate equities, and various types of mutual funds.

● Investments in tax-free bonds are desirable investments for accounts where a lower yield coupled with the tax-free advantage will produce a positive outcome for a high income individual or account. However, tax-free bonds are generally inappropriate for a lower income situation such as one situation I saw where the beneficiary’s total income was in the range of $15,000 - $20,000 per year from the trust plus Social Security benefits. The client would have been better off if the account’s funds were invested to produce a higher income.

● Keep in mind that comparisons can be made comparing the investments chosen by the bank trust department to alternative investments that were available in the market at the time the investments were made. A couple of sample hypothetical comparisons to mutual fund investments might look like this:

Vanguard xxx Index Fund
Fund began August 31, 1986
Average Annual Return Since Inception = 14.41%
Making the same distributions to the beneficiary as was actually made by the bank, the final value of the trust before taxes and any other expenses would have been $2,300,000 as compared with $1,800,000 actually earned by the trust.

Vanguard xxx Fund
Fund began March 29, 1995
Average Annual Return Since Inception = 11.74%
Making the same distributions to the beneficiary as was actually made by the bank, the final value of the trust before taxes and any other expenses would have been $1,250,000 as compared to $975,000 actually earned by the trust.

● A comparison may also be made to the average annual return of the Standard & Poor's 500 Index since the date of the creation of the trust. This comparison implies that the beneficiary could have simply invested their funds in an S&P 500 Index fund and come out with more funds in the end since they would have saved the bank trust department’s fees.

● When one of the assets in an estate or trust is a promissory note payable to the creator of the account, then it is the fiduciary duty of the bank trust department to the settlor and the beneficiaries to make all reasonable efforts to collect on the note. Banks know how to collect money, and there is no excuse for failing to apply those skills and efforts in this area.

Training

● Bank trust departments have an obligation to adequately train their employees, and to fail to do so is a deviation from nationwide normal accepted banking industry standard practices. All banks and bank trust departments are expected to train their employees to perform their job in a professional and competent manner.

● Bank trust departments should monitor employee performance, and provide training to correct any observed problems in an employee’s performance. If the employee’s problem persists after it is brought to their attention and training provided to correct the problem, the bank has to consider moving the employee to a position where they can perform, or alternatively, letting the employee go. Clearly, repeated poor or unprofessional conduct that indicates a pattern of poor job performance should be recognized by the employee’s supervisor. Failure of the bank to recognize and correct a pattern of poor job performance is a deviation from normal banking industry standard practices.

● It is often the case that the serious nature of an employee’s pattern of unprofessionalism makes it clearly foreseeable by the bank that a serious problem could result. This means that it is imperative that the bank take appropriate action to correct the problem with the employee through training or counseling or else move the employee to a position that he or she can handle or else dismiss the employee in order to avoid further problems.

● I once noticed that a new employee that was in charge of maintaining insurance coverage on real estate properties owned by estates and trusts was doing an incredibly sloppy and haphazard job. I reported her on three separate occasions and warned that if she was not further counseled, trained or replaced that a serious problem could occur.

● Then one day, it happened that a property owned by one of our accounts had burned to the ground; and there was no insurance coverage on the property. The incompetent had canceled the coverage for no apparent reason. (Note: She was not even counseled about the situation, much less trained, because as it turns out, she was the Godmother of the children of the president of the bank.) Proper training and supervision could have easily avoided this serious problem.

Communicate with the Trust Grantor, Beneficiaries or Estate Heirs

It is often useful for an executor to discuss some aspects of the administration of an estate with the beneficiaries, and to include their input into the plans for the administration of the account. I have seen cases where the beneficiaries met with the bank regarding the distribution of assets, gift taxes, the overall level of fees charged against the subject Estates, real estate commissions, and outside legal fees, yet absolutely no action on the part of the bank resulted from these conversations. This looks very bad when a bank fails to solicit conversation and incorporate the information into their management of the account.

Pay on Death

● When a person opens a checking, savings, or certificate of deposit account and executes a Payable on Death (“POD”) document identifying a person to whom the funds should be paid upon the account holder’s death, obviously the bank is obligated to abide by those instructions and manage the account as instructed. This means that the account clearly is owned by the account holder, and if he or she dies before the person named in the POD document, then the account should be paid to the person named in the POD document.

● After an account owner has executed a POD document, if they then, for whatever reason they may have, return to the bank and change the ownership structure of the account to include the POD beneficiary as a joint tenant, then the previously executed POD document becomes null and void since it would be meaningless to have a POD agreement naming a person when the person would already own the account due to their being a joint owner with the original owner.

● The file that contains the controlling documents that create an estate or trust account is usually called the “supporting papers” file or something similar. This file should always be referred to when discussing important matters, such as a change in the ownership or survivorship or structure of the account.

Interactions with the Bank

Bank trust departments must be extremely careful when initiating loans from their bank for the benefit of their trust and estate accounts. There are cases where it may be desirable and appropriate for a bank to make a loan to one of its estates or trusts, but it is certainly a slippery slope that should be undertaken only as a last resort.

Self-Dealing on the Part of Individuals or the Bank

● It is always advisable that bank officers and employees and bank trust department officers and employees not have any personal dealings with bank trust department clients.

● I have seen cases where a bank officer was paid a "finder’s fee" in conjunction with the sale of a trust-owned real estate property. This was completely improper, and was in effect a real estate commission, plain and simple, notwithstanding the convenient nomenclature devised by the two participants.

Fees

● In one case I witnessed, a bank was named as the executor of the estates of a husband and a wife; and they died about a year apart. The wife’s estate was to pour over into the husband’s estate, and it was my opinion that there should not have been an additional second fee charged on the corpus of the wife’s estate when it poured over into the husband’s estate.

● In my opinion, for a bank to charge a commission on the sale of real estate for which the bank had hired a real estate agent and also paid them a commission amounted to “double-dipping” on fees since the two fees covered the same task.

● Fees are often a function of the complexity of the assets that must be administered in the estate or trust. For example, I consulted on one estate where the major responsibility was the long-term (over 20 years) management of a multi-state business enterprise including over 150 offices of a tax preparation franchise and well over 1,000 employees. By its nature, it is highly seasonal; and the seasonality made staffing and budgeting very difficult.

● And a further management problem created by the unique nature of this business is the paradox that the business must be easily accessible to the public, but the bulk of their business takes place during only a few months of each year. Accordingly, this necessitates the acquisition of expensive, highly visible storefront locations that must be maintained year-round in order to create the required consumer confidence and to guarantee the site's availability when needed during the tax return preparation season.

● Also due to the unique nature of the business, and the fact that there are very few competing companies, there is a very thin pool of experienced managers that can be called upon to manage an enterprise such as the one owned by this estate.

● In a situation such as this one, the bank trust department certainly is justified in charging a fee that is at the top of the range for this type of job.

The Use of Outside Counsel

● Bank trust departments vary greatly in the level of legal expertise they have in-house. Certainly, clients expect a bank trust department to have some reasonable level of legal expertise and capabilities. This is one of the capabilities that bank trust department clients are paying for when they pay trust department fees.

● Each individual situation will dictate whether it is necessary or duplicative to hire an outside attorney to handle some of the affairs of the estate or trust since the bank has, or should have, staff that could handle some of the work.

● It is my opinion that when a bank trust department’s hired outside attorney informs the bank that he has a conflict of interests in advising on the same issue in which he had previously been involved, and informs the bank that they should obtain an additional outside opinion, the bank should respect that opinion and obtain a second outside and independent opinion on the issue from a competent attorney.

Real Estate Matters

● Bank trust departments should always seek the least costly way to accomplish a goal that it needs to achieve. For example, I saw a case where there was an issue involving some real estate that the bank trust department expended a great deal of time and money on in order to conclude that further expenditures had to be made in order to re-plat or subdivide a tract of land owned by one of its trust accounts. In the documents provided to me, I saw nothing that would have prevented the bank trust department from selling the real estate in smaller parcels without going to the expense of subdividing and replatting. Accordingly, the corpus of the estate should not have been charged for the unnecessary expenses incurred in subdividing and replatting the property.

● It is the duty of a bank trust department to take whatever reasonable actions are required in order to gain title to a property that is rightfully owned by one of its trust accounts.

● It is also the duty of a bank trust department to take whatever reasonable actions are required in order to market a property owned by a trust account in order to obtain investable funds that could be used to increase the income of the trust.

● In my opinion, for a bank to charge a commission on the sale of real estate for which the bank had hired a real estate agent and also paid them a commission amounted to “double-dipping” on fees since the two fees covered the same task.

Summary

In matters involving a bank trust department’s administration of its accounts, it is best to always remember that you are dealing with highly sensitive matters; and it is always best to take the safest path in accomplishing the goals set out for the account. You always want to be able to pass the “newspaper test,” that is, would you mind if what you did was on the front page of the newspaper the next day. Because sometimes, it is.

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ABOUT THE AUTHOR: Don Coker
Expert witness and consulting services. Over 490 cases for plaintiffs & defendants nationwide, 118 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.

Clients have included Fortune 500 companies, 75 banks, hedge and investment funds, cities, states, and governmental clients such as the IRS, FDIC.

Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.

B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.

Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.