Trust, but verify

• Although rare, professional trustees can commit fraud, particularly when managing trusts for vulnerable beneficiaries, leading to severe financial losses and legal battles.
• Actions, such as amending trust terms to gain "total authority" and investing trust assets in personal ventures, illustrate the potential for abuse when trustees have unchecked power.
• Trustees have a duty to act in the best interests of beneficiaries, who should regularly review trust accounts and documents, and seek legal advice if concerns arise.

While it is rare for a professional trustee to commit fraud, it can, and does, happen. In a minority of cases, the temptation of easy access to vast wealth proves too much and the trustee ventures a hand into the proverbial cookie jar. This is possible in any circumstances, but even more likely where the only beneficiary of the trust is vulnerable with capacity issues. Exhorting trust assets for personal gain contravenes a trustees’ most basic duties and will inevitably provide grounds for a claim for restitution. However, by the time the issue is identified, irreparable damage may have already been done and any victory in court could be pyrrhic. 

The Carhartt heiress 

A recent high-profile case is that of the late Gretchen Valade, heiress to the fashion company Carhartt Inc., a businesswoman in her own right and philanthropist. Ms Valade had set up two trusts – a revocable trust in 1982, and an irrevocable trust in 2009. Her lawyer David Sutherland was appointed as trustee of both. 

Towards the end of Ms Valade’s life, due to deteriorating mental and physical health, she required around-the-clock care. She had complete faith in Mr Sutherland, based on their longstanding relationship. Sadly, that faith proved to be misplaced; one lawyer involved with the case asserted that Sutherland used her "like a human ATM". 

When a wealth manager was appointed to review the 2009 life insurance trust, they discovered that, (despite the fact such trusts only typically pay policy premiums or the relevant trustee’s fees), it was $60 million in debt. This drastic depletion in trust funds had occurred without Ms Valade’s knowledge. 

After further investigation, it was discovered that Mr Sutherland had prepared documents in 2009 which granted him total control of the trusts and that he invested millions of dollars from them in his own property and business ventures. His ventures failed, and it was estimated that under Mr Sutherland’s stewardship the trusts lost at least around $37 million. To rub salt in the wound, during this time Sutherland charged $19,000 a month in fees to Valade.

Mr Sutherland was removed as trustee in August 2020 and charged with several felonies in January 2023. The case is ongoing, and it is expected he will face trial for embezzlement and for defrauding a vulnerable adult, later this year. 

What could have been done differently?

While this is a US case, the lessons to be learned apply equally to trusts in England and Wales. The most important ones are:

• Understand the trust: It is important to clearly identify the purpose and terms of the trust and to understand the scope of the trustee’s powers, remembering that in England and Wales those powers arise both from the terms of the trust itself and from statute and common law. A carefully drafted trust deed can strike the right balance between providing a trustee the powers they need to administer it efficiently and ensuring trust assets are protected. In Ms Valade’s case, Sutherland had power to amend the terms of the trusts himself until he was able to exert “total authority” over them, meaning he could effectively operate unchecked. 
• Know your rights: Trustees have a plethora of duties to their beneficiaries, a requirement to act in their best interests being chief among them. In England and Wales, beneficiaries are also entitled to receive basic financial information relating to the trust, including trust accounts and documents pertaining to trust assets. This should be requested and reviewed. If you are having difficulty with a trustee, research their obligations to you or obtain legal advice about them. Communicating carefully with your trustees to air any concerns and remind them of their duties might stymie any untoward intentions before wrongdoing occurs. 
• Be vigilant: It may be appropriate to arrange with the trustees that financial information is provided periodically, perhaps annually. This both alerts the beneficiaries to changes in asset value; and puts the trustee on notice that they are being monitored, which may help deter any wrongdoing. 

Linked to this, the trustees’ investment decisions should be monitored. In most cases, trustees have a statutory duty of care when it comes to investment decisions, which requires them to exercise reasonable skill and care in their investment decisions. Taking an active interest in investment decisions should ensure there is less scope for wrongdoing and most decent trustees will encourage dialogue about this. 

• Appoint a second trustee: Another means of protection is to appoint two (or more) trustees, rather than relying on one as Ms Valade did. Unless the trust document states otherwise, trustees must act unanimously. They are also potentially personally liable for any losses arising to the trust under their watch. So, unless two dishonest trustees are in cahoots together, the appointment of a second trustee should guard against fraudulent activity by either one of them. Two trustees make it twice as likely that the trust will be monitored and maintained properly. Most trusts in England and Wales have two trustees already because if – as is common – the trust holds real estate, at least two trustees (or a trust corporation) are required to deal with it. 
• Utilise the court’s powers: The courts in England and Wales have inherent jurisdiction to supervise trusts. This is a cornerstone of trust law, and the courts take this duty seriously. If any party with an interest in a trust has concerns about how it is being administered, they can apply for appropriate relief. The courts can demand an inventory and account from trustees who are being elusive with financial information. They can remove or replace a rogue trustee and/or order them to reimburse any losses to the trust fund personally. In some circumstances, it is even possible to obtain an order for anticipatory breach of trust, where wrongdoing is probable but has not yet occurred. The court will intervene as it sees fit to assist an injured party and it is practically guaranteed that it will do so where fraud or dishonesty on the part of a trustee is established. 
• Appoint Professional Trustees: Although there are exceptions, as Sutherland proves, a professional trustee is generally less likely to abuse their position than someone whose reputation and livelihood do not depend on maintaining their integrity. Further, in most cases the remedy for breach of trust will involve reimbursement of any losses to the trust fund. Professional trustees have professional indemnity insurance and insurers have deeper pockets than an individual (and desperate) trustee, so appointing professional trustees means reinstatement of the trust fund following a fraud is more likely. If the trustee does not hold sufficient funds to cover the loss to the trust and there is no insurance, the beneficiaries can try to recover the actual trust assets from the person who now has possession of them. This is known as tracing. Tracing actions are either pursued through common law or equity but neither is straightforward. For this reason, it is prudent to claim on insurance where possible.

Assisting the Vulnerable 

Elderly and vulnerable people are generally more susceptible to financial abuse. Good legal advisers will help educate elderly beneficiaries and those who care for them about their rights and powers. But where capacity is in question it may be impossible for the vulnerable individual to protect themselves.

Family members or offices can advocate for this, but only so far. Ultimately a legally appointed representative will be necessary. In England and Wales this requires either a Lasting Power of Attorney (LPA) or an application to the Court of Protection for a deputy to be appointed. An LPA is a legal document prepared in anticipation of loss of capacity, where an individual can appoint a person of their choice to act on their behalf if/when they lose capacity. If an individual has already lost capacity a deputy is required. This is a similar arrangement to that of an attorney, but the deputy has more restricted powers. The attorney / deputy can then manage the financial affairs of the relevant individual as above, including liaising with any trustee(s) and taking legal advice as necessary. 

Most trusts run smoothly and most trustees are honest and dependable. A few ‘bad apples’ should not undermine the many benefits of trust structures. But it is important that someone keeps those structures and the trustees’ performance under review. Where a beneficiary cannot do this themselves, families or professional representatives can step in. As Ronald Reagan was fond of saying during the period of nuclear disarmament: “trust, but verify”. 

Samara Dutton – Samara is a key member of Collyer Bristow’s Contentious trusts and probate team. She specialises in all categories of trust disputes, acting for both trustees and beneficiaries in breach of trust claims, applications for removals and other disputed aspects of trust administration, including cross-jurisdictional issues.

Cameron Crees – Cameron is an Associate in Collyer Bristow’s Trusts, tax and estate planning team. He joined Collyer Bristow in June 2022. Cameron advises high-net-worth individuals, family offices, and trust companies across a range of issues, both domestically and internationally.

Abbie Coleman – Abbie is an Associate in Collyer Bristow’s commercial disputes team. Her aim is to provide a pragmatic and cost-effective solution for clients which recognises the client’s commercial drivers. Abbie has experience in complex UK High Court and cross-jurisdictional litigation.