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The Critical Importance of Trustee Selection and Due Diligence for Asset Management

Thompson Mungo Firm April 16, 2024

Selecting a trustee to manage assets can be a tough decision that should not be taken lightly.  There are several stories from families who have selected trustees to manage a trust and have lost so much due to the trustee breaching their fiduciary duty. 

For example, the Muszynski family from Colorado faced a challenging situation when they discovered funds missing from their daughter Abagayle’s trust fund. Abagayle, who had special needs, relied on this money for her care. However, they found that a significant amount—between $250,000 to $350,000—had disappeared.

This story highlights the importance of choosing the right person or group to manage a trust fund, especially for particularly vulnerable individuals, such as those with special needs. A trustee is responsible for protecting and distributing the money in a trust and ensuring it's used for the person's benefit. They must follow strict rules and always prioritize the person's needs.

Unfortunately, the Muszynski family trusted a group called the Center for Special Needs Trust Administration. However, it was later discovered that the person in charge, Leo Govoni, had taken a large amount of money from the trust accounts for himself—over $100 million. This was a significant shock and caused many problems for families like the Muszynskis.

Selecting a trustworthy trustee is crucial. They should be honest, financially savvy, and genuinely care about the beneficiary's welfare. Think of them as reliable partners who can manage important matters responsibly.

To help families make this important decision, here are some tips for finding the right trustee:

  1. Assess Trustworthiness: Look for candidates with a proven honesty and integrity track record. Consider their reputation, character references, and past experiences in similar roles.

  2. Evaluate Financial Expertise: Seek trustees with solid financial knowledge and experience. They should understand investment principles, tax implications, and financial planning relevant to trust management.

  3. Consider Empathy and Compassion: Choose a trustee who genuinely cares about the beneficiary's needs and circumstances. They should prioritize the beneficiary's well-being and advocate for their best interests.

  4. Understand Beneficiary Needs: Customize the trustee selection process to fit the beneficiary's specific circumstances, preferences, and long-term goals. Consider involving the beneficiary or their advocate in decision-making to ensure their needs are met.

  5. Seek Recommendations: Consult trusted advisors, such as legal professionals, financial planners, or community organizations specializing in special needs advocacy. They can offer valuable insights and recommendations based on their expertise.

  6. Conduct Interviews: Take the time to interview potential trustees to assess their suitability for the role. Inquire about their approach to trust management, communication style, and commitment to transparency.

  7. Establish Clear Expectations: Clearly define the trustee's roles, responsibilities, and expectations upfront. Discuss important considerations like investment strategies, discretionary spending, and reporting requirements to ensure everyone is on the same page.

  8. Promote Ongoing Communication: Encourage open communication and collaboration between trustees, beneficiaries, and their families. Regular updates, prompt addressing of concerns, and transparency in trust administration are vital.

  9. Demand Transparency and Accountability: Inquire whether the prospective trustee conducts regular reporting to keep beneficiaries informed about the trust's financial status, transactions, and any changes in management. Transparency is key to building trust and ensuring the beneficiary's interests are upheld.

  10. Verify Background Checks: Prioritize trustees who conduct thorough background checks on their team members or individuals associated with the trust's administration. This practice demonstrates a commitment to safeguarding against potential conflicts of interest, fraud, or unethical behavior. While background checks may not uncover every negative aspect, they serve as an essential step in due diligence and risk mitigation.

  11. Regular Monitoring and Oversight: Even after selecting a trustee, it's crucial to maintain active oversight of the trust's management. Implement regular reviews of financial statements, investment performance, and trust distributions. Establishing a system of checks and balances can help detect any irregularities or potential breaches of fiduciary duty early on, allowing for swift intervention if necessary. Additionally, consider appointing a trust protector or co-trustee to provide an extra layer of supervision and accountability.

Following these guidelines and conducting thorough research, families can make informed decisions when selecting a trustee, safeguarding their loved one's financial security and well-being. Also, by emphasizing transparency, accountability, and rigorous vetting processes, families can enhance confidence in their trustee selection and minimize the likelihood of financial misconduct or negligence. 

Let's commit to making well-informed trustee selections to ensure the safety and stability of our loved ones' financial affairs.