Dear Quentin,
I am 49 and my wife is 51. Between the two of us, we’ve managed to save and invest wisely over the span of our marriage of just 14 years. We now have between us $4.2 million invested. We both plan to work another 10 years at least in as high-paying jobs as possible and invest as much as possible. We also both stand to inherit some money, which will further help us in our goal to accumulate real wealth.
The topic of inheritance presents the only problem. On my side, my father is the trustee of a generation-skipping trust his parents set up for him, my brother and me. He is allowed to invest the capital of the trust and live off the proceeds, but when he dies, the capital goes to my brother and me. He has invested the capital in normal vehicles like ETFs and stocks via a wealth planner that I also use.
“ ‘He is allowed to invest the capital of the trust and live off the proceeds, but when he dies, the capital goes to my brother and me.’ ”
However, he used the trust to build a house for himself that he intended to allow his third wife to live in. He kept the construction of the house a secret, and didn’t inform my brother and me that he was building it. When we found out, all hell broke loose. He rented out the house to friends of his wife while he decided what to do next.
Fast forward some 15 years later. Those friends are still living in the house, paying below-market rent. We never pressed him too hard on the topic, but over the last few years we let him know our desires are for him to sell that house. Now the local housing market is white-hot, so we pressed the matter again.
“ ‘It turns out our financial adviser’s wife is friends with my dad’s wife — and probably friends with the tenants as well.’ ”
It turns out our financial adviser’s wife is friends with my dad’s wife — and probably friends with the tenants as well. I am happy with our adviser overall, but I pointed out this conflict of interest recently. My dad is afraid of his wife, so he informed my brother and me that he will continue to rent that house out to their friends. He claims he asked for more rent, but they can’t afford it.
Obviously, this is a violation of his fiduciary responsibilities to maximize the profits of the trust. The house is in the trust’s name, and I will inherit it. At that time, we will sell it, so it could be worse.
Am I being greedy to demand the sale of the house and force the eviction of tenants whom I don’t know? His wife has contributed nothing financially to their marriage, and has little to no savings. I don’t see why I should tolerate the milking of my inheritance, even if I am in a financial position to do so.
Finally, I live in the most expensive city in America and do not own a home of my own, so it’s not a stretch to say I need as much money as I can get if I ever hope to own one.
Exasperated in California
Dear Exasperated,
It’s not a question of greed. It’s a question of doing the right thing. As such, I am on #TeamExasperated. No, you’re not greedy. Your relative financial security relieves you of any immediate act of desperation, but it should not be a factor in turning a blind eye to how the trust is managed.
If what you say is true, it would be difficult to hold your father responsible without doing the same with his — and your — financial adviser. This may give you leverage now, as well as food for thought should you decide to take matters further. Either way, the adviser should be the first to go.
There are three outstanding issues that determine what happens next: Did your father require your and your brother’s permission to withdraw this money and invest it in a house? Do the rules of the trust allow a capital withdrawal to be used for this kind of investment? And does this arrangement breach his and/or your financial adviser’s fiduciary duties?
Your father acted in a surreptitious and suspicious manner, and he and your financial adviser should know better than to rent a home to friends significantly below the market rate. They both acted inappropriately, secretively and, at the very best, in an ethically questionable manner.
“ ‘Your relative financial security relieves you of any immediate act of desperation, but it should not be a factor in turning a blind eye to how the trust is managed.’ ”
Another factor to consider: Did your father take this action in good faith — or was this a fraud and a breach of the fiduciary relationship? Exculpatory clauses in a trust limit the liability of the trustee.
“Courts will not enforce an exculpatory clause where the circumstances show that the inclusion of the clause in the trust was the result of fraud or the abuse of a fiduciary relationship. When determining whether the inclusion of an exculpatory clause was improper, courts will look at a number of factors,” according to the law firm Smith, Gambrell & Russell.
The Law Offices of Connie Yi sum up the responsibilities of the trustee more bluntly, and say he “must act with due regard for the rights and reasonable expectations” of the beneficiaries. That not only applies to who rents your father’s house, but also who he used as contractors to build it.
“A trust creator names beneficiaries because he or she wants them to receive select benefits. A trustee who takes actions that do not lawfully promote the rights of a beneficiary, or who fails to take actions that advance the interests of a beneficiary in the manner intended by a trustor, can become the target of a lawsuit seeking to enforce beneficiary rights,” the law firm says. That effectively means petitioning the probate court to remove the trustee.
The good news: You are not reliant on this investment financially. You are in great shape for someone of your age, and you can afford to wait until your father passes — assuming he predeceases you — to sell the house. It will likely continue to increase in value, and it may end up being a savvy investment either way.
Should you decide not to pursue a legal route to remove your father as trustee, however, you are left with the current status quo: a battle of wills between you and your father over this property, and the knowledge that the trust ultimately carries the can for the lost rent and value.
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