Latest News / The Problem of Faithless Trustees
The Problem of Faithless Trustees
July 24, 2017
There's been quite a bit of press coverage of "fiduciary duties" when it comes to professionals giving financial advice. Bank trust departments and trust companies always have been held to the fiduciary standard, and are proud of it. Unfortunately, there are some documented cases when nonprofessionals with such duties simply ignored them.
Lawrence and Millicent Stream, a successful professional couple, had an autistic son, Larry. Although Larry's condition was not severe, his parents saved for a trust to provide for him for the rest of his life after they had died. They accumulated about $2 million in that trust for Larry.
The trustee of Larry's trust was Layton Perry. We don't know how the couple knew Mr. Perry, why they chose him as trustee, and why they did not choose a bank trust department or trust company for this important job. We do know that Perry was a disbarred lawyer.
Fortunately, Perry was not named Larry's legal guardian. That job fell to Carolyn Crepps, who had worked as a legal assistant. She investigated Perry's management of the trust, and she found that he and his wife had used the assets to buy new cars for themselves, had made mortgage payments on their own home, and had made many personal withdrawals from the trust with no documentation or explanation. The $2 million fund had been reduced to $200,000.
Crepps asked the probate court to remove Perry as trustee, and he was removed. The court ordered the sale of the Perrys' cars and home, with the proceeds returned to the trust. However, that did not bring the trust fund back to its full $2 million balance.
It's a good thing Larry's parents chose a proper Guardian, but unfortunately they didn't do so well selecting a proper trustee.
James Stillman, onetime Chairman of the National City Bank of New York (which years later would be renamed Citibank), was very rich. At his death in 1918, his fortune was estimated at $1.8 billion in today's dollars. His son Chauncey used a portion of that fortune to create a family retreat, which he named "Wethersfield." He purchased art, built a mansion suitable for displaying it, and installed gardens in the style of 17th-century Italy. A family foundation was created to manage the family's money and implement their philanthropy.
In 1998 the family foundation was worth $103 million. Unfortunately, there were no family members on the board of trustees to provide proper oversight. The trustees made grants to institutions that had nothing to do with the Wethersfield Estate, including their own alma maters, and the ex-president directed over $700,000 for his personal benefit. By April 2015 the value of the foundation had shrunk to $31 million, after 14 straight years in which grants made by the foundation exceeded its revenue.
The heirs finally woke up and brought suit against the trustees, and eventually they won a settlement of $4.4 million. The trustees were replaced, and the board now includes family representation. The legal settlement won't be enough to save the Wethersfield Estate, so now the heirs have agreed to sell some of Chauncey's art collection, including works by Degas and John Singer Sargent. They are hoping to raise $12 million.
There is a saying: Rags to rags in three generations. The saying is usually interpreted to mean that the first generation creates wealth; the second conserves it; and the third squanders it. In this case it was the untrustworthy managers who squandered the fortune, but the third generation did their part by failing to supervise their advisors properly.