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In re Martha Heyman Trust

July 29, 2008

IN THE MATTER OF THE MARTHA HEYMAN TRUST AND IRREVOCABLE TRUST AGREEMENT DATED MARCH 20, 1998, DECEASED.


On appeal from the Superior Court of New Jersey, Chancery Division, Probate Part, Monmouth County, Docket No. P-243-03.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued: April 16, 2008

Before Judges Axelrad and Messano.

Robert Weston, the Trustee for a generation-skipping trust, appeals from a judgment surcharging him $347,750.52 for fees and commissions received from the trust, for lost principal and income to the trust on an investment in which he had a personal interest, for missing assets and unexplained lost funds, and for his defense accounting and counsel fees paid from trust assets. On appeal, the Trustee claims the Chancery judge: (1) improperly refused to recognize a $350,000 life insurance recovery when calculating losses to the trust; (2) disregarded evidence of the trust's true performance; and (3) erred in assessing certain specific items of damage. The grandchildren trust beneficiaries, Daniel and Steven Needler (Needlers), filed a cross-appeal contending the court erred in: (1) denying their request for counsel and expert fees; (2) denying additional damages in the amount of $24,283 for losses in self-interested investments; and (3) failing to award them prejudgment interest. We affirm the appeal and cross-appeal.

On September 11, 1986, Martha Heyman created an irrevocable trust (the Trust) at the suggestion of Weston, her longtime financial advisor. She appointed Weston, a certified financial planner and New Jersey registered investment advisor, as trustee, and he acted as trustee uninterrupted from the Trust's inception. The settlor's daughter Lori Needler*fn1 was designated the lifetime income beneficiary and Lori's children were the remaindermen. At some point, the Trustee used trust funds to purchase a $350,000 insurance policy on Lori's life to cover estate taxes based on the expectation Lori would inherit her mother's sizeable estate. Lori, however, predeceased the settlor, dying of an illness on August l7, 2002, at age sixty-seven.*fn2

Upon learning of the Trust, and becoming dissatisfied with the lack of information provided by the Trustee regarding the assets and their management, the Needlers filed an Order to Show Cause and Verified Complaint in the Chancery Division, Probate Part on September 26, 2003. They sought an accounting, distribution of any remaining trust assets, and attorneys' fees and costs.

On October 31, 2003, the court entered an order directing the Trustee to file a complete and detailed accounting from the date of inception of the Trust, including a list of fees and commissions taken by the Trustee during the life of the trust, a detailed disclosure of any trust investment in which he also made a personal investment or had any direct or indirect ownership or investment interest, and a list and appraisal of the real and personal property of the Trust as of Lori's date of death. The Trustee's accountant, Andrew M. Chavkin, CPA, prepared an accounting dated May 19, 2004 (the Chavkin report).

On April 6, 2006, the Needlers noted five exceptions to the accounting set forth in a letter from counsel, and on February 27, 2006, their expert witness, John R. Bedard, CPA, issued a report critical of the Chavkin report.

Trial took place on August 24 and November 28, 2006, during which Weston, Daniel Needler, Chavkin and Bedard testified. The Needlers argued that Weston breached his fiduciary duty by failing to maintain adequate records and account for the trust assets, and by investing in entities in which he had an ownership interest and in vehicles that granted commissions and fees to him personally for the investment. They sought disgorgement of all fees and profits garnered by Weston in his role as trustee, specifically requesting the court to surcharge Weston for losses and commissions resulting from his investment of trust assets in investment vehicles in which he had an investment or ownership interest, and for unaccounted trust assets. They also sought prejudgment interest and attorneys' fees.

The eighty-one-year-old Trustee testified it was the first trust he managed and he did not understand the responsibilities of his position. He acknowledged he handled the Trust informally, kept poor records, and lost many that he had. The Trustee had no specific ledger or document regarding each deposit or investment, no checks or registers from l986 through l996, and no tax returns from l986 through l994. Moreover, he only produced sporadic checks covering the periods from January l996 through August l998 and July 200l through October 2003. The Trustee believed the total amount put into the Trust over its life in cash and reinvested matured investments was $438,106, exclusive of Lori's life insurance proceeds, and the distributions to the life beneficiary over sixteen years was $156,000, although he did not have backup documentation for either figure. After depositing the $350,000 life insurance proceeds into the Trust, he distributed approximately $800,000 in cash and in-kind to the Needlers.

The Trustee admitted he made investments in entities in which he functioned as a partner or co-partner and in vehicles that granted commissions and fees to him personally for the investment. In particular, he unsuccessfully invested in Cambridge Partners, a high-risk hedge fund from which he received placement fees, having placed about one-third of the trust assets into this fund in 2000. Moreover, he collected fees annually from the Trust while receiving fees and commissions from these investment sources.

As a result of the Trustee's failure to maintain records, his accountant was unable to determine with certainty the amount of contributions to the Trust, disbursements, and the course of many of the investments. The Chavkin report contained the express caveat that the Trustee "never contemplated a formal accounting, and therefore, did not systematically retain and file records that would make it possible to prepare a complete and detailed accounting of all assets and activities of this Trust since inception." Chavkin acknowledged he was given the "unenviable task of trying to re-create approximately 20 years of transactions without accurate or complete records" and, as noted on the spreadsheet, much of the information was based on the Trustee's recollection and assumptions.

Although the Trustee conceded his lack of proper recordkeeping and some improper investments "in hindsight," he urged the court to consider the off-setting items that benefited the Trust. According to the Trustee, based on his reconstructed numbers, which were credible, the Trust performed quite well overall, and he thus satisfied the Prudent Investor Act, N.J.S.A. 3B:20-11.3b, evaluating a fiduciary's investment and management decisions in the context of the trust portfolio as a whole. He also argued that pursuant to N.J.S.A. 3B:19B-16, requiring a trustee to allocate to principal the proceeds of a life insurance policy ...


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