Banks, Brokerages See Growing Opportunity in Managing Estates
Bank trust departments, long the province of the wealthy few, are gearing up to play a much broader role as increasing numbers of large and complex estates are passed from the World War II generation to their children.
Baby boomers will collectively inherit trillions of dollars in coming years at a time when the chores of selling assets, managing a trust and distributing money have never been more complicated. Increased rates of divorce and remarriage as well as the acceptance of unmarried couples have increased the need for objective, though often expensive, professionals to run estates.
Banks--and more recently, brokerages--are rushing to provide the trustees needed to settle estates and mediate disputes. Lawyers, planners and certified public accountants are also getting into the act.
The demand is fueled not only by growing wealth but also by greater legal liabilities for trustees and increasingly complicated family arrangements, experts say. Some family members may live far away and have busy lives, while others with different interests might be more likely to fight aggressively for their share of estates--all of which spells opportunity for the professionals.
Major financial companies have geared up to handle the growing demand. Large banks, including Wells Fargo and Bank of America, have augmented their trust departments in recent years. Personal trust and estate assets under management by nationally chartered banks in California alone grew from $34 billion in 1988 to $95 billion in 1998, according to the Federal Financial Institutions Examinations Council.
Brokerages are also discovering the financial lure of trust departments. In January, discount brokerage Charles Schwab acquired U.S. Trust, which manages $86 billion for high-net-worth clients. At rival Merrill Lynch & Co., personal trust assets managed by the largest U.S. brokerage grew from zero in 1987 to nearly $12 billion in 1999, said Chief Operating Officer Christian G. Heilmann in New York.
Not all professional trustees work for corporations. Lawyers, CPAs and financial planners who offer estate planning advice have discovered that their clients also want help in executing those plans.
Lawyers confirm that their clients are increasingly choosing professional help. Only 5% of the clients of Irvine estate planning lawyer Beverly Verano chose corporate trustees a decade ago, but up to 30% do so today. The option is especially popular among working couples without children, she said.
“Their feeling is, ‘Our friends are busy with their lives. We’d rather name somebody who knows what they’re doing,’ ” Verano said.
Professional management also appeals to couples whose children may be unable to handle the family estate, as well as to those who have complex holdings or who want to attach elaborate conditions to the dispersal of their assets.
In these litigious days, family members and friends may also be less willing to take on the responsibility of settling someone’s affairs because California and many other states have made it easier for beneficiaries to sue trustees in estate matters.
Those risks may mean that a family member will insist on being paid generously to serve as a trustee or executor of an estate. But generally, a corporate trustee will be more expensive. Because they are normally paid a percentage of assets, many banks and trust companies will not handle estates under a certain level, often $500,000 or $1 million.
People with smaller estates may find lawyers, CPAs or planners to manage a trust for a fee of 1% of the assets.
The costs are high enough that those with small, simple estates may be better off asking a friend or family member to settle an estate, said Denis Clifford, an estate planning lawyer and author of legal self-help books, including “Plan Your Estate.”
Certainly, hiring a professional trustee is no guarantee of harmony.
Standish Smith, founder of Heirs Inc., a Villanova, Pa., beneficiary advocacy group, said he fields up to 15 calls a week from people nationwide who complain about corporate trustees who invest too conservatively, charge too much or have conflicts of interest.
Trustees reply that they are legally bound by whatever terms the people establishing the trust laid out.
“When anyone manages your money, you’re always going to think it’s not as good as what you could have done,” said Irvine estate planning lawyer Colleen Barney.
If beneficiaries decide to sue, the trustees can use trust assets to defend themselves, making it doubly costly for heirs to go to court.
Trustees may also charge termination fees even if the trust documents empower the beneficiaries to take the estate to another firm. “It’s absolutely essential to have a trustee removal clause, but that’s not a panacea,” Smith said.
Barney tries to avoid these problems by advising her clients against putting too many specific restrictions in trust documents on how their assets should be invested. Attorneys may also recommend that clients name a family member and a professional firm as co-trustees, so the beneficiaries have an equal voice.
Because of the potential for conflict of interest, families should also beware of naming outside trustees who may have separate business dealings with the lawyers who have drafted a trust or will, beneficiaries say.
Still, possibly the strongest argument for using professionals is their claim to bring valuable experience to bear when making decisions that might be too difficult for a surviving spouse, eldest child or family friend.
Some examples:
* Calling in experts. When a client left an upscale Santa Monica French restaurant in his estate in the 1980s, bank officials asked a distant relative who had his own restaurant to help them find a buyer, said US Bank Senior Vice President Jeff Hahn.
An Oregon couple left the care of their two disabled children, as well as a commercial property contaminated with hazardous waste, in the hands of Wells Fargo, said David Pittman, managing director of the bank’s trusts unit in San Francisco. The bank hired contractors to clean up the property and was able to put one child in a customized house and the other in a nursing home. “It’s been very messy,” he said.
Experts can also be helpful in valuing rare estate assets that need to be sold, said Rick Smith, trust and investment consultant at City National Bank. Among the unusual items he has had to take to auction were a collector’s teddy bear, an antique piano with sheet music and an Oscar statue.
* Enforcing conditions. Some clients want to influence wayward beneficiaries from the grave. Such an estate plan drove the plot of “The Bachelor,” last fall’s remake of a 1925 film featuring actor Chris O’Donnell as a man who would inherit $100 million only if he got married by the next day, his 30th birthday.
In real life, the requirements people leave for their beneficiaries do not always play for laughs. One couple demanded that their son take a drug test every month and present the bank trustee with medical proof that he had passed before he could receive any funds, according to Randy Orbach, chief investment and trust officer at Costa Mesa’s PriVest Bank.
* Mediating. “A lot of the complications have to do with multiple marriages and children from different spouses,” said Becky Shelton, head of Sanwa Bank’s wealth management division.
For example, children from an Orange County land baron’s first marriage disagreed with those from his second about property worth $15 million that he left with Sanwa Bank as trustee in 1990. While one group sought to sell the land, the other said, “Dad made his money in real estate and, by God, that’s what we’re going to keep!” according to Shelton.
She persuaded the parties to keep a portion of the land and sell the rest, using the proceeds to buy securities. But resolution came only after long talks with family members and their lawyers.
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Times staff writer Indraneel Sur can be reached at indraneel.sur@latimes.com.
