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Trustee - Beneficiary Mediation

by John A. Gromala & David F. Gage
January 2001

This article appeared in "Trusts & Estates" November 2000.

Beneficiaries' complaints run the gamut:
  • "The trustee takes days to return my calls and then never answers my questions."
  • "The trustee is only interested in getting the annual fees."
  • "The trustee gives me a ton of paper that tells me nothing."
  • "The trust officer keeps changing and doesn't even know our situation."

Just as varied are the ways that beneficiaries strike back at trustees. Some actively retaliate with excessive phone calls, taking up too much of the trustees' time. Others passively stew in their frustration, feeling powerless, until they explode and resort to litigation.

Trustors seldom tell their beneficiaries what they have in mind when they establish trusts. After that, trust documents and the law-not the beneficiaries' wishes-govern trustees' actions. It may not look that way to the beneficiaries, though. When the trustees bar their path to income or principal, the beneficiaries may not see a conscientious effort to adhere to the terms of the trust, but only arbitrary and capricious behavior.

Unfortunately, perceptions reign over facts, and so misperceptions can derail meaningful dialogue. Both sides may get lost trying to justify their positions. Trustees may answer beneficiaries' demands with legally appropriate responses that do not satisfy the beneficiaries' need for money or increase their understanding of the trustees' position. Animosity can build and prevent any meaningful exchanges of information. Beneficiaries often feel powerless and start believing that the only way to get justice is by filing a suit.

Mediators can provide a critical service to both trustees and beneficiaries. Being independent, with no stake in the outcome, they can meet with the parties together and separately to help them focus on a search for a solution that meets the needs of all.

The confidentiality of the mediation process allows each person to be candid with the mediator both in private and in joint meetings with all the parties. Hidden agendas are extremely common in wealth transfer situations, but the parties can reveal their concerns in private meetings with the mediator without compromising their positions. Because discussions with the mediator-including any admissions against interest-are not admissible if there are subsequent legal proceedings, mediation provides an efficient forum for airing and resolving a host of grievances.

Trust officers may feel that the deck is stacked against them when they try to have a healthy relationship with beneficiaries. Friendly conversation opens the door to subsequent allegations that the Trustee made oral representations that have not been honored. Sometimes, just the prospect of meeting with a trustee in corporate offices intimidates an unsophisticated beneficiary. The beneficiary may enter the meeting convinced that the trust officer is a heartless corporate bureaucrat who looks down on the beneficiary, even though the trust officer has no such feelings.

Here is a case in point. A grandparents' trust set out that the granddaughter (Alicia) and grandson (Joshua) would have very limited rights to income until Alicia turned 35; Joshua would then be 37. At the time the trust was established, the grandchildren were in their early twenties. Alicia was in college; Joshua had received his BS and was taking time off to travel before continuing his education. Unable to get any funds from their trust, which was producing income in the mid six figures, they consulted the attorney who drew up the trust. He suggested mediation.

In joint and separate meetings with all parties, the co-mediators became aware that the parents (Patricia and Robert) divorced while Alicia and Joshua were young, and that their mother maintained custody. Robert earned in the low to mid six figures and provided for his children well beyond what the court decree required. He remained close to both children. Their mother remarried when the children were teenagers and subsequently squandered her entire estate.

The grandparents died as the result of an accident in which Robert, their son, was permanently disabled. The grandparents' estate plan did not provide for Robert because they did not want to compound his estate tax problems. As they told him during the fatal trip, they believed-mistakenly, it turned out-that with his extensive earnings he already had a substantial estate. According to Robert, his parents were going to amend their trust upon their return-but because they never had the chance to do that, Robert received nothing from their estate except for specific bequests of little monetary value. His annual income after the accident dropped to less than $50,000, and he was no longer in a position to assist his children.

Alicia wanted to complete her undergraduate studies, go on to medical school, and become a cardiologist. Joshua's plans were a little hazy, but he spoke of wanting to expand his horizons by traveling before getting an MBA, to be followed by a JD.

It was because they thought that Robert would continue to provide for his children's education that the grandparents directed the trustee to accumulate income until their granddaughter reached age 35. Until then, no payments would be made to the grandchildren except in the event of an emergency, which was not defined. The grandparents thought their son was spoiling his children, and they did not want Alicia and Joshua to squander their inheritance.

The trust would be divided into two equal shares on Alicia's 35th birthday, with a distribution to each grandchild equal to one-third of the principal and accrued income. Thereafter Alicia and Joshua would receive the income monthly, with principal distributions of half when each beneficiary turned 40 and the balance when each one turned 45.

The trustee was advised by counsel that any distributions to the beneficiaries for educational or travel needs would violate the terms of the trust. The trustee was sympathetic to the current needs of Alicia but could not assist her. The trustee was less sympathetic toward Joshua, who demanded that he receive the same amount as his sister even though he was not in school.

The co-mediators worked with the attorneys, the trustee, the beneficiaries, and their father to help all of them understand one another's needs as well as the constraints of trust law. It came out in the mediation that Joshua's demands, which caused so much resentment in the trustee, stemmed from fear that his sister would get a greater share of the estate than he did. With the help of their father in separate sessions, the grandchildren agreed to reasonable limitations on what they would request and for what purposes, thereby reducing the trustee's anxiety.

Using what they had learned in the mediation process, the attorneys for the beneficiaries and the trustee petitioned the court to interpret the trust's language to permit an invasion of accrued income for educational expenses. All such invasions for the benefit of each beneficiary would be offset at the time of the trust's division. The offset would include interest on the advance equal to the rate of return earned by the trust during each year after the advance. The Guardian-ad-Litem for unborn contingent remainderpersons represented to the court that additional education would allow Alicia and Joshua to better provide for any contingent beneficiaries.

The court approved the petition and issued the instruction as requested.

Mediators can help the professionals and parties in estate matters look at all possible options, including new proposals that no one has considered before. The confidentiality of the mediation process opens many doors that would otherwise remain closed. Importantly, co-mediators do not give advice and do not comment on the advice given by other professionals. An interdisciplinary team of mediators composed of a psychologist and a mediator knowledgeable in estate and trust law can help the professionals and the beneficiaries with substantive issues and difficult personalities.

Where estates are concerned, intricacies of fact and law can combine with emotion, misperceptions, and complicated family dynamics to form a highly combustible mixture. Mediation can put out the fires before they consume both money and family harmony.

Biography



David Gage, Ph.D., is a clinical psychologist and founder of BMC Associates. He is the author of The Partnership Charter: How To Start Out Right with Your New Business Partnership (Or Fix the One You're In). He is a former adjunct faculty member a the Kogod School of Business at American University. BMC is a multidisciplinary team of mediators with backgrounds in law, psychology, business, and finance. The firm specializes in preventing and resolving disputes among business partners, family business owners, board members, and co-inheritors.

John Gromala
John A. Gromala, J.D., has more than 30 years of experience in transactional law and estate planning. He practices exclusively as a mediator in all aspects of trusts, wills, and conservatorship disputes (www.mediation-adr.com/gromala). He has given seminars for attorneys, business people, and mediators in the United States and Europe. His roles while practicing law included Fellow, American College of Trust and Estate Counsel; Member, Executive Committee—Estate Planning, Trust & Probate Law Section, California State Bar; and President, Humboldt County Bar Association. He is the West Coast Director of Business Mediation Associates.

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