Fiduciary Risk Management
Judith Pearson
Family Office and Trustee Liability Group leader
jpearson@woodruffsawyer.com
Read The Latest From Judith Pearson, Author | Woodruff Sawyer
Judith Pearson, a seasoned insurance industry and risk management expert, leads the Family Office & Trustee Liability Resource Group for Woodruff Sawyer and who launched Nomadx, an MGA, focused exclusively on trustee liability. Judith has an expertise in identifying, mitigating, and transferring risk for wealth transfer vehicles. Trust laws and structures are changing, complex, and contradictory, creating fiduciary responsibility and personal liability. With an understanding of this risk, Woodruff Sawyer is in a position to educate trustees, and other fiduciaries to reduce risk as well as implement insurance solutions to transfer risk which surpasses what’s currently available in the marketplace. Clients include individual and professional trustees, trust companies, law firms, and CPA’s as well as family offices and private trust companies.
Prior to joining Woodruff Sawyer and re-launching Nomadx as an MGA, she formed Nomadx Solutions, LLC to provide risk management solutions to fiduciaries. Ms. Pearson was President of ARIS Title Insurance Corporation, which was formed under her direction to provide title insurance for fine art and other important collectibles. While leading ARIS, she was named one of the 2015 Power of 100 Leaders in the art world by Blouin/Artinfo International for her role as an insurance innovator.
Ms. Pearson also held the positions of Senior Executive Vice President of Chicago-based AON Corporation’s Financial Services Group (“FSG”) and head of FSG’s intellectual property division. A veteran in the insurance industry, her career includes underwriting for AIG and then Chubb as an underwriting manager and acting as an insurance broker at AON and one of its acquisitions. At AON, Ms. Pearson specialized in Intellectual Property Liability, Directors’ and Officers’ Liability, Fidelity and similar coverage forms and underwriting for U.S based Fortune 500 and equivalent foreign-based corporations.
Ms. Pearson has been a frequent speaker at Trust and Estate Forums and the ABA Trust School. Additionally, Ms. Pearson has been quoted in The Wall Street Journal, New York Times, The Economist, Chicago Sun Times, LA Times, Art and Auction Magazine and has written articles for Trust & Estates, Wealth Management, and Estate Planning Magazines.
Kirby Rosplock
Welcome to the Tamarind Learning Podcast. I'm your host, Dr. Kirby Rosplock, and today we are with Judy Pearson, who is a seasoned guru in the family office in the Trustee Liability Resource Group for Woodruff Sawyer. She has many, many seasoned years of experience under her belt and she's maverick at helping families sort of design and understand what their risks are as they're transferring wealth in different kinds of trust structures. So we're thrilled to have Judy here today and we're excited to dig more into sort of personal liability, the role of the trust, the role of the trustee, and how can we protect families and their beneficiaries as we're planning with wealth transfer. So Judy, welcome.
Judy Pearson
Well, thank you, Kirby. I really appreciate you including me in your podcast.
Kirby Rosplock
Well, I'm excited to dig in and really get to the heart of what do we mean by the fiduciary and what are some of the key duties that you see as the role of the trustee.
Judy Pearson
So I think it's really important when somebody takes on the role of the trustee that they understand the enormity of the job and there's a lot of technical aspects to it. And most importantly, they're then held to the highest standard of the law, which becomes a lot of personal liability. On a general basis, we can talk about what are the fiduciary duties and especially as it relates to a trust.
Judy Pearson
So, kind of at the 100,000 foot view, we have a couple of duties that we should talk about the duty of obedience, which is really talking about understanding the trust instrument and what their abilities are to manage through that and adhering to the trust terms. So when they are asked by a beneficiary to perhaps make a distribution that might not quite be applicable, they understand what it means and what their flexibilities are. The second piece is the duty of prudence and reasonableness in making their administrative decisions. That sounds like an easy thing, but it means that they should really have trusted advisors behind them and get educated to make sure when they're making a decision that it is prudent and it is reasonable based on their duties.
Judy Pearson
And then finally objectivity. It's really important. It sometimes sounds like a really easy thing. Most trustees will get into this and think, well, I can be objective on everything, but there's often situations where it's not so easy to make an objective decision. And when you have lots of personal relationships, that can get really complicated. And there's also an aspect of transparency which can get really complicated. The transparency comes from you've got reporting requirements, you've got tax issues, but transparency can get complicated when maybe there is information that shouldn't be distributed to everybody or you're asked questions. So it can be really complicated. But we need to really understand what the fiduciary duties are and how complex they can get.
Kirby Rosplock
And it's not as if there's just one kind of trustee I think that's where this gets even more rich and dynamic is the fact that there's various kinds of trustees. Talk to us a little bit more about the role of the trustee and how it might be very different if you're an individual trustee, a corporate trustee, private trust company, so there's different kinds of fiduciaries.
Judy Pearson
Yeah and sometimes you can mix the best of each one together too. So we can kind of start with the family trustee and the family trustee isn't obvious. We have a family relationship. They understand the intent of the grantor, good relationships. They're just there to help orchestrate different things. And they're generally people who are not compensated and those family trustees, if they're going to take on the role without anybody else supporting them, really need to think about how much time that can take and how complicated the decisions can get. And we can get into some very real situations as we go on. There's a lot of benefits to it, right? There's not as much cost to it. There's the family relationships however, they may not know all the roles and responsibilities. They may not know all the technical aspects of what to do, what comes first and how to make some of the decisions.
Judy Pearson
On the opposite end of the spectrum is the institutional trustee. Those can be the big banks and that's where it used to start and stop. The big banks have great education. They've got succession planning in place, they have risk management techniques, they've got all the platforms that you could possibly imagine. But there are some downsides to that sometimes too. Some families think about the cost. Some families think about how engaged is that person with the family and how well do they know things.
Judy Pearson
And then the in between is a new role that we're starting to see a lot of which is what we would call the independent or the professional trustee. Those are generally people that have a business relationship with the grantor and they know the family but they're independent because they're not part of it. They're not any beneficiaries or it could be the lawyers or the CPAs and we're even seeing some RIAs being asked because they really know these individuals on an intimate basis. And then what we're starting to see is retired trust officers, retired lawyers and what have you that say well wait a minute, I have a lot of knowledge, I'm willing to take my retirement and continue this work and that's all I'm doing. And they'll take on multiple families and it is possible to mix and match some of these things. You can have a family member who is a co-trustee with an institution or is a co-trustee with an educated professional or they hire one of these folks as agent for trustee.
Judy Pearson
And then on the institutional level we've been seeing a lot of what I would call independent or administrative trust companies that started in the directed trust environment but are now starting to broaden their services. So there's a lot of options for families once they sit down and think about what do we really want out of our trustee and how can we put the best people together?
Kirby Rosplock
So when somebody's setting up a trust and they're thinking about who should be the trustee or trustees for this trust, this kind of planning and this kind of risk management lens should be a big part of the discussion, would you say?
Judy Pearson
It is so important. And I have to say it's one of the conversations that's least had. And when you think about it, you as a wealth owner have spent so much time creating the wealth or creating the legacy and you have a vision and you did that intentionally and you hired great support people around you, whether it's a board of directors or the CEOs and what have you. You should take the same kind of care when you create your trust and when you appoint the trustees
Kirby Rosplock
And tell us a little bit more how you see the risk management aspect of the role of trustee. Because certainly there's a lot of personal liability, right? You are really responsible as an independent trustee specifically, but even as a corporate fiduciary, now the corporation shoulders that liability. Talk to us more about the changing landscape and what you see clients doing to protect their trustees and protect their trust and protect their beneficiaries.
Judy Pearson
Oh boy, that's a big question. Let me write that one down. So the first part is the risk management side of it. And just like anything else, the first part of risk management is identifying the exposure points, identifying the family dynamics. Now I'm a technical girl, and you know a ton of really great family dynamics people, but this is where we come together trying to create the communication, trying to create the intent, trying to create the platform to make sure that you know what to do and what you shouldn't do. I would say your board of advisors is almost like your board of directors. Make sure you have competent lawyers and accountants. A lot of people think, oh I have an accountant, but the accountants don't always know trust accounting. So just like everything else, you have to make sure you have the right person who can help you make the right decisions.
Judy Pearson
It's communication, right? I think one of the things I love about what you guys do is educating the beneficiary. Because if the beneficiary doesn't understand what their roles are in this, what they can get, how to get a distribution, how to make a presentation to the trustee, how to have a voice in the family, all the things that you do.
Judy Pearson
It's a huge part of risk management that nobody thinks about. Everybody thinks about the trustee and the wealth owner. So there's a ton of different things. There's educational platforms out there in addition to the beneficiary and the family governance, there's trustee education out there. And so once somebody is going to take these roles to make sure they understand how to get educated around it, I would say communication is probably the number one risk management technique out there. Because just with everything else, people may get upset. And if it gets too far, that's when the litigation starts. There's ways to manage through it. So that's kind of the risk management piece of it. The changing landscape is there's an enormous amount of wealth, whether it be multi-generational or new wealth. And with all the liquidity events that have taken place in the last couple of years, people are now starting to figure out well, what does that mean and what do I do with that? As a result of what the families are really looking for. There's new laws that have been incorporated over the last 20 years but are still evolving and changing. And that's really going from the traditional trust structure where all the roles and responsibilities are managed by the trustee versus what we would call the directed trust environment where those roles have been bifurcated.
Judy Pearson
And that gives oftentimes families more control, it gives more protection around the various decision makers, but it's also an untested environment and I see a lot of broadening of what these roles could be like. I like to pick on trust protector as an example. And I don't mean that in a bad way, it's just that a trust protector was created as an example, as a very administrative role. But over time it's been stretched. And as it gets stretched it goes from non fiduciary responsibility to a fiduciary responsibility or people taking on that role have gotten excited about the opportunity and gone beyond what their actual duty is, which opens them up to liability. So I use that as a really easy example of what goes on. But pretty much everything we see in the directed trust environment is being stretched and molded and changed. So it'll be interesting to see how it evolves over time. And it, on one hand, creates significant opportunity for families, it also creates significant opportunity for testing and therefore liability.
Kirby Rosplock
I don't think we talk about that L word liability enough when we talk about the fiduciary world, at least in the education space. And I love and appreciate so much that you bring up that probably one of the greatest risk management tools is education, is creating a baseline of communication, is establishing some norms and professionalizing right. That relationship between the beneficiary and the fiduciaries, be it corporate, individual, family member and that's a hat that doesn't get discussed independent of all those other sort of roles that you might pull in. So I am super duper appreciative that you kind of came back to that. And thank you for the clarification on the changing landscape, because thinking about how the roles are evolving and changing requires actually more intent, more knowledge, and more process and protocol to make sure you're executing within the bounds right, of what your role truly is. And you understand when you're sort of sipping out of bounds and might be exposed a little bit more from the liability standpoint.
Kirby Rosplock
Are there any examples or other experiences that you'd like to share around sort of personal risk as it relates to a fiduciary?
Judy Pearson
Yeah. And before we go there, I would like to step back to the third question you asked before and that's how do you protect the trustee? Because I think there's a lot of misinformation there. So the first thing is it depends on when the trust document was crafted and who the lawyers are that have helped craft those trust instruments. So the first thing that I would encourage everybody to look into is to see if there's indemnification of the trustee with trust assets. That's the first place to look, but it's not the final place to look.
[00:15:32.250] - Kirby Rosplock
Do you mind just explaining indemnification so that they're not comfortable with that term?
Judy Pearson
Sure. So indemnification means when you're asking a trustee to serve in this role and there is a potential claim for negligence, that the trustee can use those trust assets to recoup expenses they had in potentially defending themselves against a claim. And a lot of people say, well wait a minute, why would I want to do that? Is that not a conflict of interest? And I like to use the analogy of a corporate board because that's where I started my career so very many years ago and that was always a question. And the question is why do boards, indemnify boards of directors and why do they buy insurance? Well, it's to attract the best of the best and to make sure that those individuals feel comfortable in making decisions that can be tricky, that they know that they're going to be backed by the creator and the intent is to protect them in that situation. But that can fall apart if there is a litigation because oftentimes what happens is you have to go to the judge to see if they can get assets to be able to use for this indemnification or amount of dollars to help protect they can use to protect themselves, to hire a lawyer, hire whatever.
Judy Pearson
And the judge may not allow for the indemnification until the claim is settled. So that means that the trustee has now put their own personal assets at risk in order to defend themselves. But it's still an important thing to put the indemnification provision in there. The second piece is it's important for the trust to allow for insurance to be purchased not only to protect the assets in the trust, especially if there's a family business or something else, but also for the trustee to be able to perhaps be able to protect themselves from that perspective. So there are ways to help the trustee feel more confident in their decision making if they have the ability to protect themselves. So, kind of moving on to your question about personal liability, the way the law is set up, it's set up that these are fiduciary duties that you are individually making. And if there is a claim it is an individual suit against the individual trustee. I'm kind of taking the corporate trustee out of it because they have their own corporate protection. But the only way you can import corporate protection is if you are a regulated trust company.
Judy Pearson
And we've already established that there's two other kinds of trustees out there. So we're going to focus on the two other trustees, which is the professional trustee and the individual trustee. But I see lots of things come up that people don't think about. I have a situation right now where one of my families had a professional trustee and they had to make a distribution that was very complex and they weren't really thinking through what was going on in the volatile economy. And the distribution that they thought they were making was worth X, but because of the economy it was worth much less than X, but there was a finality to it. And so the beneficiary didn't get what they thought they were getting and the beneficiary didn't understand these dynamics either. And so the family is kind of saying, well, we have to figure out a way to correct it. But it's not so easy because there are multiple trusts and multiple accounting things and sales that had already taken place and what have you. And so there's a potential for big potential individual risk for the trustee on how they made the decision and they're trying to figure out a way to work through it where there isn't that personal liability.
Judy Pearson
But there's all sorts of things that happen. Or I like to talk about new laws that people haven't really thought about. There's the new Corporate Transparency Act which the final rules were sent out September 22. And it's all about the government wanting to get access to beneficial information or beneficial ownership of like LLCs and special purpose vehicles. So any entity that has been created by going to the Department of Treasury now, there's records on it and a trustee is responsible now reporting to the government the beneficial ownership and it comes with it civil and criminal penalties. And so it's one of these, as we start talking about it, that people need to be educated and they need to know where to go get education about the changing roles, right? Because that's something if somebody didn't know about it, they might not be doing the appropriate reporting and now they've got personal liability. So these are just a couple of scenarios where we can kind of go on and on and on and on. When you start with what are our roles and responsibilities, they seem so easy and straightforward. But then when you get into the very specific decision that you have to make, how very complex it can be.
[00:21:40.510] - Kirby Rosplock
Well, if there's just one or two sort of key takeaways when it comes to managing risk and the role of the fiduciary, what would you like to leave our listeners, viewers with today?
Judy Pearson
I want to leave everybody with - choose the trustee carefully, choose the structure even more carefully. Make sure that everybody understands their roles, responsibilities and liabilities and make sure those people are protected so you can get the best of the best taking on these roles and not going to your second or third choice because the best of the best know what they're putting themselves up for.
Kirby Rosplock
Judy, thank you so much for sharing your knowledge, your expertise and your insights on this complex landscape of the fiduciary, managing risk and sharing with us so many great ideas of how to get more educated. I know you've got a ton more resources, so we will be linking your profile because you have a lot more connected to your LinkedIn site and your thought leadership. So I'm so grateful for your friendship, but even more grateful that you could be here today on the Tamarind Learning podcast.
Judy Pearson
Thank you so much for including me and happy to answer any questions anybody might have.
