In 1998 Nicola’s grandmother died leaving her $25,000. Nicola was too young to receive her inheritance so her mother, Tina, asked a professional trustee, Kauri Trustees, to hold the money in trust until Nicola turned 20 years of age.
In 2011 Tina contacted Kauri Trustees because she was concerned Nicola’s inheritance had not increased in value. Kauri Trustees reassured Tina it was holding Nicola’s share for her benefit and had released some money for her education. Tina continued to worry about the value of Nicola’s investment and in 2014 referred a complaint to us.
In 1998 Nicola’s inheritance was worth about $25,000. By 2014 it was worth only $15,000. Tina said if the money had been put in a term deposit at a bank Nicola’s inheritance would now be worth about $45,000. Tina acknowledged some funds had been released over the years to pay education related expenses. Tina did not think Nicola’s inheritance should be worth $45,000, but had a sense of unease about Kauri Trustees’ management of Nicola’s inheritance and asked us to take a look.
Over the last 15 years the investment had earned on average 5.05%, less than the 6% it would have earned in a bank term deposit. Although the income earned was disappointing, we could not see any evidence of mismanagement by Kauri Trustees.
Instead we were concerned about the impact of Kauri Trustees’ fees on the investment. It was reasonable for Kauri Trustees to be paid for managing Nicola’s investment. During the first ten years the investment earned more than the fees charged. But in 2010 the fees increased considerably. Between March 2011 and March 2014 the investment earned $2,147.69 and Kauri Trustees charged fees of $6,028.99. We were concerned that, with the level of Kauri Trustees’ fees, Nicola’s investment was not sustainable. When Tina raised her concerns in 2011 we would have expected Kauri Trustees to do something to mitigate the loss.
We looked closely at the fees charged by Kauri Trustees since 2011. Kauri Trustees had charged a special fee of $512 for the meeting with Tina in 2011. We did not think it was fair for Kauri Trustees to charge Nicola for Tina’s meeting, especially when Kauri Trustees did nothing to address Tina’s concerns. Kauri Trustees also charged $180 over two years for disbursements. We considered the disbursements should be covered in the trustee service charge and could not see what the $180 was for. We recommended Kauri Trustees reimburse both the $512 and the $180 to the trust.
We considered that from 2011 on Kauri Trustees should have realised Nicola’s investment was not sustainable. We recommended Kauri Trustees reimburse half the fees charged since 2011.
As Nicola was almost 20 years of age we suggested Kauri Trustees meet with Nicola and Tina to discuss the early release of the estate to avoid continuing to diminish the value of her inheritance.
Nicola, Tina and Kauri Trustees accepted our recommendation and the complaint was resolved.
It should not have taken a complaint to us for Kauri Trustees to realise there was a problem with Nicola’s investment. We regard it as best practice for trustees to monitor the investments they are managing. If an investment is no longer economic, and diminishing as a result of trustee management fees, we expect the trustee to alert the beneficiaries. It is not enough to send the beneficiaries account statements. If there is a risk there may be no funds left for the beneficiary to inherit, the trustee should draw this possibility to the beneficiary’s attention. It may be possible for the trustee to:
- change the fee structure
- resign in favour of a friend or family member who is prepared to manage the investment at no cost
- release the funds for a purpose consistent with the aims of the trust.