Fiduciaries are often tasked with managing a finite amount of trust or estate assets while navigating beneficiary needs, family dynamics, and potential issues that may arise. With multiple beneficiaries, managing funds can become a balancing act for the fiduciary, who must safeguard the best interests of all beneficiaries’ shares under the fiduciary’s control. For some beneficiaries, the assets may also hold significant emotional value. If this combination of money and emotions boils over, litigation can ensue. Ironically, such disputes can deplete the finite resources available for distribution. This article discusses some warning signs that a dispute might be brewing and offers best practices to prevent litigation and drainage of distributable assets.
Potential Warning Signs and Other Cracks in the China
A central ingredient in the relationship between a fiduciary and the beneficiaries is communication. Fiduciaries should frequently communicate with beneficiaries to provide updates on the trust or estate administration. How a beneficiary responds to the fiduciary is illuminating. A change in how a beneficiary communicates could signify that the beneficiary is unhappy or that a misunderstanding is developing. For instance, beneficiaries may not initially request information but simply accept what the fiduciary provides, or they may request only summaries. At some point, those same beneficiaries may begin demanding more detailed information or supporting documentation. At a minimum, this likely means that a beneficiary is compiling a record. But it could also indicate a beneficiary has concerns about the administration.
A change in tone can also signal discontent. Perhaps communications suggest more suspicion or become more accusatory. A beneficiary may not remember that certain information was already provided or that he or she never voiced an objection to a certain decision. Such shifting positions or forgetfulness could indicate a potential dispute.
Another warning sign is when a beneficiary begins including more people in the conversation, such as additional family members (e.g., spouses), personal financial advisors, or attorneys. This shift can be as obvious as a beneficiary including these individuals directly on communications or an overt reference that their advisors seek more information. A non-lawyer beneficiary may also uncharacteristically cite statutes to support or justify his or her positions.
Fiduciary Best Practices
Fiduciaries can take meaningful steps to minimize the risk of disputes, primarily in how they communicate with beneficiaries. Regular updates about the administration process are helpful. When there are no substantive updates to report, it is helpful when a fiduciary provides a recap summarizing how the parties reached the current position, along with an anticipated timeline for next steps. If no such timeline is ascertainable, then a fiduciary should let beneficiaries know. That way, beneficiaries are not left wondering what happened to the assets they are expecting to receive.
Another strategy is education. Most people do not understand how a trust or estate must be administered. A fiduciary who explains why assets are distributed in a certain way, or why a certain decision was made, can help a beneficiary understand the process. For instance, many do not understand the critical distinction between probate assets that are distributed from an estate, separate trust assets, and assets that pass by operation of law to named beneficiaries on accounts. Understandably, many do not understand the tax process triggered upon the death of a testator, settlor, or his or her surviving spouse, or the ongoing tax considerations from both the federal and state level that may dictate how or when distributions can be made. Keeping beneficiaries highly educated about the process can help reduce the chances of disputes. If disputes still arise, a record inclusive of frequent, thorough, and informative communications will protect the fiduciary.
Nor is it always problematic for beneficiaries to involve new legal counsel. An attorney can help fiduciaries communicate to beneficiaries and educate them about the administration process and its many challenges. To non-lawyers, and even to lawyers who do not practice in trust and estates, administration can be confusing. It is not everyone’s cup of tea. Involving a lawyer can help a beneficiary understand why certain assets can be distributed at a certain time and others cannot. Most often, beneficiaries are concerned with mismanagement of assets, even if no support for such claims exists. Counsel can assuage these concerns by explaining the nuances and complexities of administration. Although obtaining counsel could indicate forthcoming litigation, that counsel may instead help prevent such escalation.
Finally, a fiduciary may be concerned about a certain decision. For instance, a fiduciary could authorize an appropriate and permissible distribution under the terms of the trust document, but a beneficiary may still object. Alternatively, a beneficiary could insist that the fiduciary transfer certain assets over to him, but the fiduciary knows that such transfer is not in the best interests of the beneficiary or the entire trust corpus. In either case, if in doubt, the fiduciary can always seek court guidance. Petitioning the court is a strategic tool, because, regardless of the outcome, it provides the fiduciary clear instructions and allows beneficiaries to participate and object. Early court intervention may in fact save the fiduciary — and the beneficiaries — from a later, more contentious dispute.
Fiduciaries cannot control all circumstances that may cause beneficiary disputes. But fiduciaries can try to best anticipate potential disagreements, and help prevent escalation, through monitoring communications and regular check-ins with beneficiaries. Fiduciaries can also use those communications and continued education of beneficiaries to proactively minimize the risks of dispute.
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