Managing Testamentary Trusts Can Yield Lots of Litigation
For the last three decades of my legal career I was housed in an office “just down the hall” from the Estate Planning (later “Wealth Planning”) Department. On those days when I wasn’t in court I could see the nicely dressed couples wandering into the office to plan and then execute their estate documents.
It all seemed so peaceful. Couples who had worked hard to create an estate were now figuring out how to divide the bounty once the reaper appeared on stage. The planning seemed focused on making certain that any cameo appearance by Uncle Sam and the state department of revenue would be brief and relatively painless.
From the view of the domestic relations world, estate planning seemed like Margaritaville. There was an aspect of it similar to the career of Jimmy Buffet. The phrase of the 1970s was “Don’t Worry. Be Happy.” I saw my Domestic Relations Department as better aligned with Johnny Cash. We dealt more in the “mud, the blood and the beer.”
Until his death in 2023 Jimmy Buffet parlayed his unique music genre into what is reported as a $275,000,000 empire. He died leaving a wife of 45 years and three kids.
The estate plan apparently involves a marital trust with Mrs. Buffet and the familiy’s financial planner as co-trustees.
On the surface this would seem to be an excellent plan. The spouse/mother is a co-trustee with a “financial professional” who undestands the empire. Although ill for some time, Buffet kept his financial world complicated. He owned a variety of businesses built around his brand estimated to be work $75 million in addition to $35 million in real estate. Planes are $15 million and art another $11 million. Cars and guitars came in at $7 million. The song catalogue does not seem to be part of the trust.
The widow has sued claiming that she gets only $2,000,000 a year and has had no transparency in terms of understanding why it is so small. The co-trustee financial planner has sued to have her removed professing that she is harrassing him and impeding management. How this plays out remains to be seen but there are lessons here for all of us who think a trust is the solution.
If you read Mr. Buffet’s Wikipedia bio, you can see how he built a commercial empire around his persona as light-hearted entertainer. Hotels, restaurants, food and beverage endorsements all played into this financial world built around a “Be Happy” lifestyle. From a commercial standpoint the death of the prophet espousing that lifestyle is a problem. Paul Newman is still hawking lemonade and salad dressing 17 years after his death but the factors are not the same. The happiness lifestyle just doesn’t match up when staying at a resort where the featured star is now dead, If I call to invite friends to join me for dinner at one of the 27 Margaritaville restaurants, chances are one of my guests will respond “Isn’t he dead?” Not exactly the response I want to a casual night out.
So, the market value of the empire built around the light-hearted singer has suffered a blow that affects both value and liquidity. If I solicit investors to buy the Buffet restaurants in Niagara Falls or Atlantic City, the response I am likely to get is: “Aren’t they all dead?” This is a persistent family business problem. The family waited too long to sell.
This also occurs with real estate and “stuff” like art collections, cars and guitars. No one wants to raise these subjects when a person is ill. Alas, when the end comes, the expense of maintaining these things persists while the income that supports life’s indulgenses often drops precipitously.
Then there is the dicey question of how well two trustees get along once the leading figure in the cast is called offstage. Many times, that leading figure is by personality or reputation, larger than life. No one opposed him or her. But in death, a whole new dynamic emerges. And, as we see in the L’affire Buffet, it doesn’t look good so far.
The solution typically offered when this problem arises is the corporate or institutional trustee. Banks used to be the primary players in this field but it is now crowded with
investment firms. They do their jobs and with precision. But they don’t like gamey assets that require active management (e.g., restaurants, hotels). Just bring the armored car of cash to the loading dock and they will diversify it and see to it that all the beneficiaries get a monthly check. They will do the taxes and vote the shares of whatever they invest in. Highly efficient and, some argue, pretty expensive.
Corporate trustees also want to avoid tailored individual needs. They grasp that almost any effort to accommodate “what the grantor would have wanted” triggers conflict and misunderstandings. A trust the size of Buffet’s could accommodate paying for a child’s graduate degree or underwrite a business that one of the children dreamed of forming. But if one kid gets to go to grad school on the trust’s dime, is it fair to turn down another child’s request for help with private school tuition or a summer in Europe? Corporate trustees look at all of these decisions through the oculus of whether a court or other beneficiaries will claim they mismanaged the trust. The answer is often “No.”
Lastly, but not “leastly” is who will decide disputes like the Buffet Trust. Put yourself in that position as a California judge. Two people are fighting over $275 million dollars. If three quarters of that had been converted to bonds, the income would be $750,000 a month ($9M a year) to support the “needs” while keeping $75 million available for houses and “toys.” Instead you have two trustees fighting over an illiquid estate where one gets a benefit of $160,000 a month while another collects $80,000 a month to manage the trust assets. You are presiding over a sexy case but the state pays you a measley $13,000 a month to play adult in the room. That gets old fast as they fight over a million dollar houseboat while you are wondering whether you can afford a new engine for your Boston Whaler.
Trusts are a very useful device and can be quite tax efficient. But, if you are taking the estate planner’s bait, consider how best to keep the fish in your family from doing battle over asset and income distribution management once you are summoned to that
Margaritaville in the sky.