A few weeks ago, I attended a panel session on how to pick a trustee. There were a range of leading experts on the podium supporting a variety of opinions. Luckily, I was not among them, because one comment from a leading lawyer in a well-known offshore financial centre made my blood boil!
‘Let’s face it,’ he said, ‘we make a lot more money out of our clients if they use professional trustees’.
How true, but how wrong.
To explain I will tell you the story of Frank (name and details have been changed to protect the family).
Frank set up a trust and transferred to his trustees his pharmaceutical business. In due course, he died and two of his three sons, became directors and turned it from a successful business to a well-known brand. The trust was administered in Hong Kong, by professional trustees.
The third of Frank’s sons, Martin, was not involved with the business. He married a beautiful and immensely rich woman, Margy. Martin and Margy lived a glamorous lifestyle in Monaco – that is, until Margy took up tennis.
With the children grown up, while Martin ran their family office, Margy played tennis and, fell in love with her tennis partner, a handsome widower. When, this came to light Martin was furious. In due course, Margy and Martin separated, and Margy sacked Martin from running her family office and chucked him out of their sumptuous apartment.
Angry and bitter, Martin turned to his brothers. They were each living comfortable lifestyles in houses with swimming pools and fancy cars, whereas he saw himself as having been badly treated and impoverished.
Martin angrily approached the trustee, to insist that as shareholder, it had a duty to all three siblings and should therefore dispute the directors’ remuneration and insist the company pay a better dividend to the trust.
On receipt of Martin’s demands the professional trustee panicked. Martin could sue it, for dereliction of its fiduciary duty of care to look after the interests of all three beneficiaries. It sought a legal opinion. However, the lawyers were unable to opine, without sight of the company accounts going back five years, a thorough research of the pharmaceutical sector and a review of comparable businesses.
This initial work took two months and the legal bill for the trust was $150,000. However, the report failed to make any recommendations as to how the dispute could be resolved, it was a statement of the facts and a list of what other directors in similar businesses were earning – some higher some lower.
Martin’s reaction was that the report was evidence of fraud with the collusion of the Trustee. His brothers, he was convinced, were using their powers as Directors, to ‘milk’ the company, depriving the shareholder and him of a dividend.
On the other hand, his brothers saw the report as justification for their hard work and success, to which Martin had not contributed.
In month three, both Martin and his brothers had engaged their own lawyers, which delivered to the Trustee their legal bills, of $100,000 each!
Over the next three years, the dispute cost the Trust a fortune. But it was also a distraction. Martin’s brothers were unable to concentrate on running the business and the profits fell by 30%.
Martin saw the fall in profits, as further proof that his brothers were deliberately running down the business to reduce its value, to pay him less!
With falling profits however, Martin’s brothers were reluctant to saddle the company with debt. However, they also realized that until the dispute was resolved they could not focus on the business to bring its profits back up. Each side became more and more bitter and the arguments became increasingly personal.
After three years, and much distress and anger, the brothers finally decided to mediate. By this stage Martin and his brothers could not bear to be in the same room. Each arrived at the hotel where the mediation was to be held, by separate entrances and occupied separate rooms on separate floors.
The mediation lasted three days, but eventually both sides were sufficiently worn down to agree a settlement – which neither side was happy with. The final figure paid to Martin could have been more if they had mediated from the start and not incurred three years of professional fees.
Sadly, Martin’s situation is not unusual. As I say in my book, ‘When you are Super Rich who can you Trust?’ no-one can avoid concerns and miss-understandings from arising, but how they are resolved can make the difference between an irritating concern, or the creation of a catastrophe.
If you would like to find out how to structure your trust to deal with disputes, should they ever rise, please contact me on 020 3740 7422, or e mail me on email@example.com Furthermore, if you would like to buy my books ‘When you are Super Rich who can you Trust?’ or ‘How to win business from Private Clients’ go to my website www.garnhamfos.com or buy them direct from Amazon.