Here's the text of an article I wrote that appeared in today's Los Angeles Daily Journal, with some advice on where not to put your money (or your heart):
One of our firm’s maxims is “Don’t marry a stripper.” You may laugh, but we’ve seen a number of men (and women) come into our office after waking up to find their car, cash, bank account, collectibles and new wife or husband have all mysteriously disappeared. The once-besotted and now justifiably infuriated victim may have thought the object of his or her infatuation had a heart of gold and could be trusted, but experience in the law, let alone human history, tells us otherwise.
Another of our maxims is “Money’s not safe in a safe.” Sure, our banking system has taken some hits lately, but it is still quite surprising how many people squirrel away tens or even hundreds of thousands of dollars under the mattress, in linen closets and beneath floorboards. We’re not just talking gang bangers here, but people from all walks of life. And while a massive black safe in the garage may offer greater protection than a cookie jar during its owner’s lifetime, what about after the owner passes away or becomes incapacitated?
Unfortunately, the owner has typically informed a “trusted” family member or friend about the stash of cash, and in the case of a safe, provided the combination. When the rightful heirs open the safe, everyone is stunned to find the money, jewelry, coins, baseball cards and (gasp) the Star Wars action figures long gone. Even if the heirs have a good idea of who took everything, the burden of proof is on the executor, trustee or heirs themselves to not only prove who took it, but also how much was taken. Without a paper trail, it’s almost impossible.
So if a spouse turns out to be unreliable and a safe isn’t safe enough, who or what can an individual trust? Who can help ensure hard-earned wealth is protected and wishes carried out regarding the administration and/or distribution of assets in the event of incapacity or death? Can the trustee even be trusted?
You have to trust someone, don’t you?
Estate planning is often viewed as one of the gentler practice areas of the law, and perhaps it is. However, you still see plenty of tragedy. I probably see more of this than the average estate planning attorney because our firm is large, highly diverse and focuses on a variety of practice areas, including family law and probate litigation. Our attorneys often represent clients who did not come to us for estate planning initially, but are now seeking counsel because they are in danger of losing many or all of their assets to divorce, a contested will, improper administration of a trust, probate problems and more. For example, one of our litigators had a prospective client come in seeking redress from a sibling who had been named trustee of the family’s estate, and had even been allowed to create the trust herself. This trustee used the proceeds from the trust to open a restaurant, which subsequently folded, taking all of the siblings’ money with it. Since she lacked insurance, and had filed for bankruptcy herself, the money, sadly, was gone for good.
Or consider this: a kindhearted divorcee with young children wills his well-educated brother the family’s homestead. After the divorcee’s passing, his brother transfers title of the home to himself and then borrows against the equity. Unfortunately, the brother suffers several business setbacks, loses the money he borrowed and the house eventually goes into foreclosure.
Given that situations like these happen quite often, who can someone trust to manage his or her affairs in the event of incapacity or after death? This is one of the most difficult questions facing any individual or family. Many of our clients initially think of a close family member, particularly a son or daughter. This choice gives rise to a number of questions, which we invariably raise with our clients. Does the son or daughter have the time and knowledge to administer a trust, let alone a large estate? What about the daughter or son-in-law—can they be trusted? In the event of a child’s divorce and remarriage, will the client’s wishes still be carried out with respect to grandchildren? If you name one child as executor or trustee, how will the other children feel about it and what might they do to contest it? If you name all of the children as executors or trustees, will they get along?
Questions like these, and many more, are critically important to ask and very difficult to answer. The fact is, choosing an executor or trustee is a tough decision, particularly when you consider the financial stakes involved.
The rise of the professional fiduciary.
Professional fiduciaries have been around for many years, but they have not been widely used until fairly recently. Why? One of the primary reasons is that professional fiduciaries have earned, rightfully so, a reputation for undue prudence in the management of assets. To put it bluntly, in an attempt to avoid liability, professional fiduciaries have historically made extremely conservative investments and failed to obtain reasonable returns. (Of course, one could argue that a son, daughter, brother, uncle, etc. is not necessarily going to achieve stellar returns either. But hey, they’re family, right?)
The problem of professional fiduciaries being far too conservative in their approach to asset management began to change with the passage of several pertinent laws in California. One of the most important was the California Prudent Investment Act, which made professional fiduciaries liable if they did not achieve reasonable returns. Not a bad incentive for a individual or family to expect sound administration of a trust or estate. Another advantage of professional fiduciaries is that they must carry insurance, thereby providing greater protection to trust and estate assets. Combine these benefits with the numerous problems mentioned above in choosing a family member as executor or trustee, it is not so surprising that professional fiduciaries are becoming more and more popular.
So can a professional fiduciary be trusted? Well, at least their track record can be fully investigated. And even though, as any prospectus will tell you, “Past results do not guarantee future returns,” the professional fiduciary may very well be a sound choice to help ensure assets are protected, returns on investment are reasonable, wishes are carried out and legacies endure. In any case, it sure beats turning everything over to Uncle Fester. Like everything else in estate planning and asset protection, keep your eyes—and your ears—wide open.
Chris Johnson, Esquire, Co-Founder and Partner with the Law Firm of Russakow, Ryan, and Johnson, focuses on advanced estate planning, trusts and business succession. For more information visit www.rrjlaw.com.
