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The Partnership charter

The Partnership Charter by David Gage Millions of people co-own closely held companies, family businesses, and business partnerships, but establishing them and keeping them together is never easy. Here, finally, is the guide they have been waiting for.... Read More

Trustee / Beneficiary Mediation = Less Litigation

Trusts & Estates: The Journal of Wealth Management for Estate Planning Professionals

by John A. Gromala and David F. Gage
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. 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 remainder persons 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.

John A. Gromala, the West Coast director of BMC Associates, is pioneering the use of mediation during the estate planning process as a means to prevent future conflict and litigation. He has extensive experience in estate planning and has served as a member of the California Bar’s section on Estate Planning, Trust and Probate Law and as a Fellow in the American College of Trust and Estate Counsel. David Gage is the founder and director of BMC Associates.