Take the TOLI Challenge: Can you answer this?

What is most important when determining the liability of a trustee’s actions?

Over the years, we have noticed that the knowledge of TOLI trustees varies from trust company to trust company. After publishing the TOLI Handbook in 2018, we thought we would “chunk it down” in 2019 with the TOLI Challenge—a series of questions designed to test the knowledge of the typical TOLI trustee. We will be publishing questions throughout the year and hope that you accept the challenge and maybe learn something new throughout the year.

Our first question:

What is most important when determining the liability of a trustee’s actions?

  1. The outcome
  2. Whether they follow the grantor’s instructions
  3. Whether the policy performs as expected
  4. The process

Before we blurt out the correct answer, let’s walk through the options.

The first option is the outcome determines the liability, and certainly, a negative result can draw the ire of the beneficiaries and initiate an action against the trustee, but often, the adverse outcome is outside the control of the trustee. If the outcome is because of direct negligence of the trustee, there may be an opportunity for the beneficiaries to move ahead with their claim.

The second option is whether the trustee follows the grantor’s instructions. If by grantors’ instructions we mean to follow the trust document, then this answer has some validity. After all, a trustee needs to review the trust document and then administer the trust according to the guidelines of that document. However, if it means following the whims of the grantor, then certainly the answer is no, as can be seen in Paradee v. Paradee.  

The third option deals with policy performance, and if this is an issue, then many trustees would be in trouble because in general, policies have not performed well over the last ten years or more. In Nacchio v. David Weinstein and the AYCO Company, we saw a fiduciary held liable for over $14M in a case that centered around policy performance.

All the answers above could have some consideration, but we believe the answer is the process. For the other options – each of which could bring liability – a proper process could either alleviate the problem or negate the liability.

If a policy has a negative outcome, it is not necessarily the trustee’s fault. The Uniform Prudent Investors Act (UPIA) speaks to this in Section 8 of the UPIA in reference to prudent decision making as it deals with compliance, which it says is “determined considering the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.” As long as the decision making at the time was prudent, liability will be limited. How to ensure it is? Have a prudent process that is followed and documented.

The second choice, following the grantor’s instructions, could be an issue, but not if you had a sound practice in-house to follow the guidelines of the trust document in a prudent manner, and as part of your administrative and decision-making process, you are not swayed by the whims of the grantor. For some trustees, this has been an issue – after all, the grantor pays the bills, but Section 5 of the UPIA is clear when it says a trustee is required to “invest and manage the trust assets solely in the interest of the beneficiaries.”

The third choice, policy performance, could be problematic for those trustees who have not closely tracked their portfolio and made their grantors aware of the situation. In the Nacchio case, the policies brought in had rate of return assumptions of over 10.5%, which were never attained. Again, the process followed could alleviate the issues that could come from a policy that did not live up to expectations. When the policy is taken in, make it your policy to assume very conservative returns for the cash-value investment. Create a document that shows the outcome (and additional costs) at a lower return and have it signed by the grantor and made part of the trust file. As part of your prudent process, review the policy annually, and if the policy is off track, provide the grantor with a solution (typically, more premium).

So, the answer, we believe is the fourth choice: the process followed is the most critical factor when determining the liability of a trustee’s actions. This is not the first time we have said this, and it won’t be the last. We firmly believe in the prudent process. It is the backbone of our business model.

The outcome cannot be (completely) controlled, but the process can.

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