In March of this year I wrote an article entitled “One Trustee’s Dilemma Solved.” It told the story of a hedge fund manager, Rod Paulson, who, upon the death of his good friend and fellow hedge fund manager Steve Lamberti, found himself trustee of trusts for Lamberti’s two sons, Mario and Paul. The article highlights some of the challenges and perils involved in acting personally as trustee of personal trusts, and offers a suggestion for help. Since publication, I’ve received a number of requests for my thoughts on how Rod should respond to distribution requests by Mario and Paul.
Here is the background: At the time Rod became trustee, Mario and Paul were grown and starting families of their own, and began to make requests for discretionary distributions from their trusts. Paul wanted to buy a large house on the water in another state, and Mario wanted to buy an exotic and very expensive Pagani Huayra sports car.
The boys’ stepmother Julia, Steve Lamberti’s widow, strongly objected to the distribution requests. While Julia was entitled to income from the trusts during her lifetime, and thus was also a beneficiary to whom Rod owed fiduciary duties, she had no role in the administration of their trusts. Rod found himself uncomfortably in the middle of a difficult family argument – with pressure from all sides and the fiduciary responsibility to make a prudent decision on the requests.
Here is how I would counsel Rod to proceed. First, I would suggest he reach out to Julia to hear her concerns. Most likely, she is worried about the impact of any principal distributions on the level of income she would receive from the trusts. That is a legitimate concern and one that Rod must take into account when making his decisions. Julia may also have unique insights into what Steve intended when setting up the trusts, which could help inform Rod’s decision-making.
There may be other issues and concerns, and possibly some animosity between Julia and the boys; Rod must evaluate those concerns fairly but must avoid allowing Julia’s personal feelings to affect performance of his duty of impartiality among all trust beneficiaries. It is my experience that Rod’s best course of action would be to listen carefully and empathetically to Julia’s concerns without immediately committing to any particular action. Sometimes, people just need to feel that they are being heard.
Mario’s request to buy a “supercar” is problematic on a number of fronts. While some supercars can appreciate significantly in value over time, they are known as high risk investments the success of which depends highly on a buyer’s knowledge and market intuition. They would generally not be a prudent trust investment, especially absent such expertise. Presumably, Mario’s intent is to drive the car; however, he is still in his early 20s, and there are too many instances of young men losing control of these high-powered machines with tragic consequences for Rod to ignore.
Given the fact that it is not unreasonable for a young man to want a nice car, my recommendation to Rod would be to say no to the Pagani but yes to a distribution sufficient to purchase a more reasonable performance car, but condition that distribution on Mario’s successful completion of a performance driving course.
Paul and his wife are expecting their third child; the request for a trust distribution to purchase a larger house is not in and of itself unreasonable, and in fact is often specifically contemplated by the trust creator and authorized in the trust instrument. However, Paul has his sights set on a very expensive waterfront home in an exclusive gated community that is way beyond his ability to finance on his own. He has asked that the trust bear the full cost of purchasing the house, either directly in trust or via distribution of funds to Paul. Julia is vehemently opposed to this action, both because of its dramatic impact on her income distributions, and because she deeply dislikes Paul and his wife and has made it clear to Rod that she does not want them getting “one red cent” of trust principal.
Here is what I would recommend Rod consider: Agree to make a principal distribution to assist Paul and his wife in buying a new house. In determining the proper amount of that distribution, I would suggest Rod look to local market data, particularly average house prices in the town, city or county in which they wish to purchase. Rod could then offer to distribute principal in that amount, with Paul and his wife responsible for selecting a house and financing any excess. To my mind, this would be a reasonable response to the distribution request, consistent with the likely intent of the trust instrument, and responsibly responsive to Julia’s concern about impact on her income distributions.
Serving as trustee of personal trusts can be complicated and difficult. The trustee owes duties of prudence in action and investment, loyalty in terms of putting the interests of the trust and the beneficiaries above his or her own, and impartiality in weighing and addressing the (often competing) interests of multiple beneficiaries. The latter has often been termed “the duty to disappoint equally,” and the trustee who is faithful to her or his responsibilities is often no one’s friend in the end. That result comes with the job, and should be considered before accepting the role.
Given all this, I fully expect that Rod would ask me to be the one delivering the news to the beneficiaries!