Trust Planning

Trust Planning

Estate Planning and Wealth Management

Conflicts of Interest Common in Estate Planning

Stephen J. Dunn
Forbes - Jul 15 2010

Stephen J. Dunn, C.P.A., J.D., LLM, is a tax attorney and adjunct lecturer in the University of Michigan-Dearborn College of Business. The summary that follows is based on Dunn's article (unfortunately, no longer accessible online) on how lawyers and bank-trustees often shirk their fiduciary responsibility.

How do conflicts of interest show up in estate planning?

Conflicts of interests in estate planning are very common, and typically occur when an estate attorney or bank representative may manage a trust with his or her individual benefits in mind. Dunn describes troubling scenarios that can arise regarding the designation of fiduciaries when banks and lawyers refer work to one another. The same lawyer who receives an estate planning referral from a bank, for example, may then later be hired by the bank as trustee’s council after convincing his client to appoint the bank as trustee. Meanwhile, when the client follows the estate lawyer’s advice to appoint the bank as trustee, the bank is then in the disturbingly unethical position of being able to appoint itself as investment advisor, earning both hourly fees as trustee for preparing tax and other paperwork, and yearly management fees and investment commissions as investment advisor.

It is also unethical for an attorney drafting estate planning documents to name himself as trustee/executor or counsel for the trustee/executor.

Choose bank trustee or an individual as trustee?

It can appear that a bank would be a better trustee, but the client almost always gets shortchanged. The bank, as trustee, can assign the roles of investment adviser and counsel. Usually these roles are filled by the bank and its affiliated attorney. The bank (now investment adviser) and attorney (trustee's counsel), over time accrue control over massive amounts of money—largely benefiting themselves. These are clear conflicts in fiduciary responsibility.

To avoid this scenario, Dunn recommends having a list of family members or other reliable persons to serve as your trustee. See How to Choose a Trustee.

Am I at risk for fiduciary responsibility conflicts of interest?

Elderly persons have the highest risk of conflicts of interest. Dunn cites a case example that involves an elderly woman and her neighbor. The neighbor closely observed the elderly woman's digressing health, and eventually crept into the woman's estate planning documents. When the elderly woman finally died, the neighbor had cut four charities out of the will in order to receive the estate funds herself.

Why avoid probate? How do I go about avoiding probate?

Probate is expensive, delays distribution of estate assets, and is a public proceeding that invites people to make claims against the estate.

To avoid probate, one can establish a revocable trust and transfer property to that trust while living. Upon death the trust becomes irrevocable, and is administered following the trust document.

How should my spouse and I handle marital property in our trust?

Each party should have their own revocable trust, with the marital property divided as equally as possible between them.