I thought of his comment when I read Chancery Court Refuses to Remove Trustee of Trust Despite Less Than Ideal Treatment of Old Lady on the Delaware Corporate Litigation blog.
Here's a very short version.
Elderly couple owns 10,000 shares of highly appreciated Exxon stock worth $840,000 in 1996. Husband becomes incompetent, Wife (age 74) succumbs to entreaties from long-time broker-advisor to create a charitable remainder trust for the money. Ostensible purpose is to avoid capital gains tax (higher in those days, of course). Merrill Lynch Trust Company will be the trustee. The unitrust payout rate is set at 10%!
Wife (Florida resident) has no lawyer, so ML helpfully has a New York lawyer draft the trust. The lawyer never speaks to Wife, and includes a variety of provision egregiously favoring ML, such as
1. Merrill Lynch Trust's unilateral ability to increase its fees;Alas, Wife did not have her own attorney look at the trust before executing it and tranferring her assets to it. After the value of the trust was down by 50%, she brought a lawsuit for fraud to undo the arrangement. The court seemed sympathetic, but the 3-year statute of limitations had run (decision here).
2. No requirement that Merrill Lynch Trust seek the most cost effective brokerage service fees; instead, it could pay whatever standard fees Pierce might charge.
So Wife wanted to get another trustee. No dice, under the trust agreement (decision here). To add insult to injury, ML Trust got the Court to approve the payment of all its attorneys fees out of the charitable trust itself.
Cases such as these do not make the trust marketer's life easier.
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2 comments:
Merrill Lynch seems to be dying for its sins, so I won't pile on.
Just as there are no atheists in foxholes, there are few financially-oriented businesses that cannot proclaim themselves to be "banks," as we discovered in the recent financial unpleasantness. Setting up a "trust company" appears to be equally simple; the operational end is easy to outsource.
Fortunately, Jim Gust isn't merely marketing the drafting of trust documents or the operational aspects of trust service. Merrill Anderson's core clientele are real live fiduciary organizations – trust companies and the trust divisions of genuine banks. And, yes, like Jack Bogle, I believe we must find a way to provide a truly fiduciary level of investment services to the Boomer generation. Remember, the bulk of the Boomers are still in their fifties. The youngest, in their forties. As they reach retirement age, affluent Boomers won't need wealth managers. They'll need wealth defenders.
P.S. If the elderly woman had held on to her $840,000 in Exxon stock, today it would be worth close to $3 million.
She would have invaded principal in any event. She was looking to get $80,000 a year income, and mistakenly thought the the CRT guaranteed that, based upon the broker's assurance that the investment return would stay above 10%. The lawsuit was filed because the income fell so low, about the time she had medical reversals and needed to invade principal. Which she could not do, of course.
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