Graduation Year

2024

Document Type

Dissertation

Degree

D.B.A.

Degree Granting Department

Business Administration

Major Professor

Robert Hammond, D.B.A

Co-Major Professor

Sunil Mithas, Ph.D.

Committee Member

Matthew Mullarkey, Ph.D.

Committee Member

Alan Hevner, Ph.D.

Keywords

Adverse Selection, Attorney Behavior, Grantor Behavior, Informational Imbalance, Moral Hazard, Trustee Behavior

Abstract

Revocable living trust documents (trusts) are among the most important documents created in contemporary estate planning. One of the trust’s objectives is to provide clear guidance to the trustees on how to carry out the grantor's intent. When a trust is contested in court, the objective of the trust has clearly failed. Consequently, understanding why trusts go to court and developing approaches that reduce or eliminate the number of trusts in our courts is an endeavor worthy of research and the primary objective of this research effort.

Ideally, with a clearly stated grantor’s intent and clearly executed interpretation of the trust for the interested parties upon the grantor’s death, an estate can be settled with limited complications. However, academic research and Florida court cases suggest that many trust documents do not accomplish those objectives. The scope of the problem was cited in Financial Planning magazine in March 2000. Millions of trusts are established each year, and 90% do not properly provide for surviving spouses and children (Croke 2000, pp. 59-64). In 2010, Vic Preisser and Roy Williams wrote, “70 percent of estates become unglued after the estate transitions” (p. 43). The Florida Supreme Court, the Florida Bar, Florida trial court cases, and academic research note that trust documents are flawed for a variety of reasons.

To identify the root causes for this failure of trusts, a thematic analysis of 31 Florida trial and appellate cases was conducted. Five themes describing causes for trust failure were identified from analyzing the court cases and compared to law firm websites and academic literature. Notably, little overlap exists between the court cases, law firm websites, and the 31 Florida court cases.

Understanding how these five causes of failure occur became the primordial focus of this research by exploring the principal and agent relationships among the actors in any trust arrangement – the grantor, attorney, and beneficiaries. The research found that the information asymmetry that exists between these actors can lead to adverse selection and moral hazard at the time of trust creation and the time of trust execution. The research found that efforts to mitigate and avoid the information asymmetry in six critical relationships at two distinct times in the event horizon of trusts may be the most meaningful way to avoid court cases and inure grantors’ intent in future trust creation and trust execution.

The implications of this research are significant, including producing information to educate trust grantors, financial professionals, and attorneys on potential interruptions to a grantor’s intent. The research explains the potential for adverse selection and moral hazard affecting the information exchange between the three key actors in a trust document and explores a heretofore undiscussed asymmetry that occurs at the time of trust creation and trust execution. The fact that three distinct principal-agent relationships can be found to occur at each of these temporal points in the trust document “lifespan” explains how trusts end up in court and what interventions might be considered to avoid – even, guard against - the information asymmetry in future trust documents.

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