ABA Bank Compliance - May/June 2011

Supporting account documentation did not demonstrate why the monthly disbursement was appropriate or provide an estimate of the beneficiary’s long-term needs.

■ ■ Supplemental needs trust: The budget in the account file was incomplete and merely listed some, not all, bills. Although the file indicated that the account had a 10-year time horizon, no documentation within the file assessed the beneficiary’s needs compared with the available assets.

■ ■ Irrevocable trust: The fiduciary issued funds for a luxury vehicle for the income beneficiary without proper approval or review from the trust committee. In this particular instance, the file had no budget or additional documentation to support the distribution.

The administrator also did not demonstrate with the supporting documentation how the purchase of a luxury vehicle met specific guidance within the governing instrument for making such distributions.

instance when discretion is exercised regarding invading principal. A fiduciary might also find it prudent to require that supporting documentation be noted on an internally developed form used for discretionary distributions. This form should then be submitted to a higher authority for review and approval.

Fiduciaries should also develop budgets based on the various sources of income and expenses. It’s best to obtain documentation that supports budgeted figures, such as tax returns and medical bills, and an analysis of the amount of funds remaining and the time period of need for the beneficiary. It’s imperative that the budget extrapolate over the trust’s time horizon. Without this sort of detailed analysis, the goals established by the settlor might not be reached because the funds will be depleted.

Cover your Bases

Collecting and considering the proper documentation and supporting information is about more than just complying with paperwork—it’s also about exercising the discretionary distribution power in the most effective manner for all involved. Smart, informed decisions will sustain the beneficiaries, satisfy the settlor’s intent, and protect your institution against claims. ■

regarding disbursement limits for approvals so administrators can approve distributions up to a set dollar amount, yet must obtain prior approval from the trust committee for distributions in greater amounts.

Note that this practice works best when it contains two parts: one limit for the specific dollar amount within the request and a second limit based on total discretionary distributions made from the account relationship within the calendar year. If the second limit is not established, the trust committee might be surprised by how much could be distributed from an account without the committee’s oversight. For example, a typical first limit is $10,000 at any one time for an administrator before needing approval from a higher source. If the second limit is not established, the fiduciary may distribute an indeterminate amount of account assets without the approval of a higher source.

■ ■ Lack of documentation for discretionary distributions: The OCC examination manual expressly states that “all discretionary distribution decisions should be adequately supported, documented, and approved by an authorized authority.” Some fiduciaries, however, make distributions without such support. Frequently, the rationale for distributions is not sufficient, with documentation ranging from a brief note from the beneficiary to a note or memo in the file from the administrator. In some instances documentation might not exist at all. Too often, documentation insufficiently spells out the rationale for making the distribution.

■ ■ Lack of committee or equivalent oversight: Even if a fiduciary isn’t required to consult a committee regarding distributions that fall under the approval threshold, it’s nonetheless wise to seek review of distributions to make sure they are in line with the terms of the governing instrument, the trust department’s policies and procedures, and the trust company’s or trust department’s risk appetite.

Recommendations
Far too often, fiduciaries are not sufficiently
documenting their decision-making processes
for discretionary distributions. If questions or
disputes about discretionary distributions arise
after some time has passed, a fiduciary needs
documented support for its decisions, especially
if those responsible for the decision are no longer
with the trust department or trust company. Fail-
ure to properly document the decision-making
process can land a fiduciary in the courtroom
without the necessary tools to defend itself
against upset beneficiaries. Insufficient documen-
tation might also lead to regulatory criticism.
The need for detailed documentation is
particularly vital when a trustee must determine
whether to invade principal for a beneficiary.
Every administrative officer should understand
the importance of thoroughly documenting
with appropriate supporting information each
DAviD FitES is with Crowe Horwath LLP in the
Fort Lauderdale, Fla., office. He can be reached at
954-492-4418 or david.fites@crowehorwath.com.

CLAYtON MitChELL is with Crowe Horwath LLP in the Indianapolis, Ind., office. He can be reached at 317-208-2438 or clayton.mitchell@ crowehorwath.com.

ShutterStoCk

The administrator also did not demonstrate with the
supporting documentation how the purchase of a luxury
vehicle met specific guidance within the governing
instrument for making such distributions.

About the Authors

PAuL OSbORNE is a partner with Crowe Horwath LLP in the Indianapolis office. Reach him at (317) 706-2601 or via e-mail at paul. osborne@crowehorwath.com.

Real-Life Examples

Recent audits have uncovered the following deficiencies in trust accounts that could trigger regulatory criticism and litigation against the respective trustees: