An Heir-Raising Enterprise : Money: You inherit big bucks, but the bank has its own ideas about how the funds should be managed. It may be time to call in the trust-buster.
It’s simple mathematics: If you invested $1 in 1952, and your investment kept pace with the rate of inflation--nothing more, nothing less--that dollar would be worth $5.29 today. That’s a 429% increase.
So how come the $2-million trust fund a Berkeley woman and six members of her family inherited in 1952 is worth “only” $3.2 million today--a 63% rate of return over the last four decades?
The question seems simple, but the bank that administers the trust didn’t want to answer it.
“They’re completely unaccountable, and they collect their fees regardless,” charges the Berkeley heiress, who asked that her name not be used.
Here’s where Standish--”call me Stan”--Smith comes in.
He’s an elfin 60-year-old resident of Philadelphia’s tony Main Line who has taken it upon himself to fight a battle matching two relatively unsympathetic antagonists: people with inherited wealth and the banks that manage their money.
Smith is the driving force behind Heirs, a year-old organization that fights for the rights of trust fund beneficiaries. Heirs’ primary thrust is to change the laws that govern bank-managed trusts, those in which even totally incompetent trust administrators can be removed only through legal action.
“What we are saying,” says Smith, “is that the beneficiary must have the right to shop, to switch, to watch over his own welfare, because there isn’t anyone else to do that.”
Heirs has not taken on a simple task: The trusts are irrevocable. They are usually set up for tax reasons and because the people placing the money in trusts believe their heirs might squander it.
A trustee is supposed to be a benevolent godfather who carefully manages the money and protects the interests of at least three constituencies: the person who set up the trust, the recipients of the its income and any future beneficiaries.
But some beneficiaries believe that an unholy alliance has sprung up among trust departments, probate courts and estate attorneys, creating a situation in which they have almost no influence over how their money is invested, reported on and spent.
As the Berkeley heiress says of her large East Coast trust bank: “They don’t respond to anything, they don’t think it’s a good idea you know what’s invested and they don’t think it’s a good idea you ask about performance.”
Mike Crotty, deputy general counsel for litigation of the Washington, D.C.-based American Banker’s Assn., takes exception:
“The money hasn’t been left to them (the beneficiaries). It’s been left to the bank, with the obligation to dispense the money at the behest of the person who put the money there in the first place, and it’s the bank’s obligation to do what the trust requires them to do.”
Why should Joe or Jane Average care about these tales of fiduciary woe? After all, the Berkeley heiress’s under-performing portfolio still pays a guaranteed annual income of $24,000.
Stan Smith claims it’s because the bank/beneficiary fight is not really a rich man’s struggle.
“The average bank-managed trust is $500,000,” he says, “and if you think $500,000 is a huge amount of money, OK, fine. But it’s not in the mega-millions. We have people in our files who have trusts as small as $10,000 and one who’s got one as big as $500 million.”
Smith believes almost anyone can relate to horror stories of mismanagement, collusion, incompetence and insensitivity. If the banks can mess with the big boys, Heirs is saying, what are they doing to your poor savings account?
As of Jan. 1, 1991, the Federal Reserve System counted nearly 900,000 irrevocable trusts in American banks, representing more than $450 billion. In California, more than 36,000 of these trusts added up to more than $30 billion.
Since the typical annual fee for a $1-million trust (bookkeeping, money management, etc.) is about 1% of principal, the nation’s banks earn about $4.5 billion just for having the money in their vaults.
If you’re looking for tales of pity and woe, Heirs has ‘em.
* There’s the 68-year old widow living off a 13-year-old trust that has not grown much beyond its original $200,000 (many beneficiaries are widows with little financial expertise). She goes to her bank and asks the trustee for $20,000 out of principal so she can get major dental work. The trustee tells her to have her teeth pulled. When the widow sues to have the trustee removed, she finds the bank has the legal right to use her money to defend itself.
* Then there’s the descendant of John Wanamaker, the department store magnate. She received a $300,000 trust in 1933, which her bank managed to double. Unfortunately, it took 40 years to do so, by which time the purchasing power of the trust had declined below what it should have been, if it had been managed properly.
* There’s the Pennsylvania dairy heir whose uncle was named executor of her father’s estate. Instead of funding the two trusts the father had provided for in his will, the uncle used the money to guarantee a bank loan to a business partner. This meant the estate couldn’t be settled until the loan was repaid, which took more than eight years. The heiress spent more than $150,000 in legal fees fighting for her money, while her uncle’s legal expenses were paid by the estate.
The banking industry sees these as aberrations in an otherwise responsible field. And it views organizations like Heirs as fronts for plaintiff law firms, a way to terrorize banks by suing them.
“The first couple of banks they go after will settle the cases, and that only encourages (Heirs) to sue more banks, but eventually (the banks) will fight back and win,” says the ABA’s Crotty, who sees Heirs as a fad with a limited amount of nuisance value.
Stan Smith, of course, begs to differ.
“What’s the downside,” he says, “to letting a beneficiary watch his assets and monitor his own account?” Besides, the charge that Heirs is simply a front for the firm of Sue, Threaten and Subpoena is totally untrue. It’s a grass-roots movement that just happens to involve folks with cash, he says.
Smith’s interest in trusts dates to 1976, when his wife inherited $1.6 million from her mother. He vividly recalls an initial meeting with the bankers who were administering the estate. “When I said, ‘I think the portfolio needs a little tuning up,’ they looked at me as if to say, ‘What the hell do you know about investment?’ ”
About 1988, Smith--a psychologist and statistician whose father once worked at a brokerage house--put an ad in a local legal newspaper, asking for dissatisfied beneficiaries. He received a number of responses but didn’t pursue them until two years later, when he made a few phone calls and organized a meeting that was covered by the Philadelphia Inquirer. The subsequent story elicited 160 responses, and Heirs was on its way.
The organization, run out of the basement of Smith’s pleasant, but far from swank, split-level house in this Philadelphia suburb, has a mailing list of 850 disgruntled heirs, as well as a Canadian chapter. It is trying to get the Pennsylvania Legislature to pass a bill that would allow beneficiaries to switch trustees without showing cause and is pushing for full disclosure of bank performance.
“Give them good accounting records,” says Smith. “Give them comparisons with how much money you had originally and how much today.”
There’s no doubt Heirs has helped put rich folks on the offensive, and so far it is enjoying a modest winning streak.
In August, a U.S. district judge found that Pittsburgh-based Mellon Bank was charging “unreasonable” fees for its trust services and ordered the bank to refund $56 million plus interest. Mellon is appealing the action brought by two Heirs members.
An offshoot of Heirs--Heirs and Beneficiaries in Bryn Mawr, Pa.--has filed a class-action suit on behalf of all Pennsylvania beneficiaries and claims that at least one major Philadelphia bank has already agreed to have aspects of its trust operation monitored.
Right now Standish Smith, grandson of a chemical company mogul, is fighting for his cause with the tenacity of a Marxist rabble-rouser. He’s learned that the workers of the world are not the only people who need to chuck their chains.
And he has been quoted as saying that his experiences with trust officers have taught him that “the real world is exploitation.”
But he also talks about this being an issue of “faith,” that people trusted a bank to do right by their money and that “if the bank malperforms, then the intent of the settlor is thwarted.”
Says the Berkeley heiress, who fully recognizes that most people will find it hard to sympathize with her plight: “Everybody has something to give to their children. I don’t care if it’s only $5. Well, my grandfather put trust in that bank, and it’s let him down. And that’s not a small thing.”
