When establishing trusts for clients, whether a stand alone trust or a trust that is established by the clients’ Will, we talk through a lot of decisions. One of the most important, if not the most important, decisions is deciding who will be the trustee. A trust designed to span multiple decades can generally only be as successful as the trustee who manages it. Trustees bear a fiduciary responsibility to ethically act in the best interests of the trust beneficiaries. Fiduciary responsibilities include, among other things, to:
– Administer and invest the trust property according to the trust document;
– Act impartially when dealing with trust property and payments to beneficiaries;
– Exercise discretionary powers over distributions of income and principal to beneficiaries;
– Maintain clear and accurate financial records, file income tax returns, and they may have to report that information periodically to the beneficiaries;
– Follow up on any legal claims and defend the trust;
– And distribute the principal of the trust to the appropriate persons upon termination of the trust.
Designating Family Trustees
Many times a family member of close friend of the family is considered for a trustee role. When you consider a family member, make sure to keep the following in mind.
(1) Make sure you understand exactly what the trust’s purpose and specific provisions are first, notify the trustee that they are being listed, and ask for their permission or willingness to serve.
(2) Make sure the trustee understands your family’s history. Gauge whether the trustee may objectively and responsibly carry out the duties independently. Are there family disputes or problems that could hinder the trustee’s impartiality? Keep in mind that the trustee will have to treat all of the beneficiaries impartially, which is the reason designating a professional trustee or naming co-trustees may be a better option for families with complicated or strained relationships. Does this trustee have the characteristics to make difficult decisions when needed without upsetting the family?
(3) Does the trustee have the skills and expertise to carry out their duties? Be sure to select prudent and accessible trustees who can carry out the provisions of the trust and manage investment, tax, accounting, legal, and interpersonal issues. Choose impartial trustees who are flexible and sensitive to the family’s aspirations and changing needs of the trust.
(4) Carefully review the trustees qualifications and look at their backgrounds. See if they have ever been sued in a trust or investment related lawsuit. Whomever assumes the role of trustee must have either a solid track record of managing investments or selecting an investment advisor who is also a fiduciary and monitoring that advisor’s performance. The trustee needs to manage the trust assets in a way that is appropriate for the long-term needs of the beneficiaries, many of whom may be young children. Simultaneously, the trustee has to recognize the needs of the current income beneficiaries. These two needs are generally in conflict. The trustee has a duty to make the trust’s assets productive, as assets need to produce earnings, appreciate in value, or benefit the trust’s current and future beneficiaries in some other way.
(5) Can the trustee keep the beneficiaries informed about the trust? The trustee’s duty may require balancing the right to know against rights of privacy, such as in the case of healthcare decisions. Additionally, some trust provisions or default laws on trusts mandate that the trustee provide an accounting to some or all of the beneficiaries. Generally, the trustee must notify the beneficiaries of a trust when certain important events occur, such as a revocable trust becoming irrevocable, a change of trustee, or a change of trustee fees. Failure to follow through on these duties can result in serious ramifications.
(6) Continuity for the long-term nature of most trusts is important. Is the trustee available and are there back-ups in the case of incapacity or death?
(7) Does the family member-trustee expect to be paid? There can be a considerable amount of work required in this role that generally requires payment.
(8) Is the trustee’s state of residence an issue regarding state level taxes or other state trust laws?
Professional and Corporate Trustees
A professional or corporate trustee may be preferable for larger, more intricate trusts, or if a family member does not have the expertise to be the sole trustee. A professional trustee is expected to bring experience, objectivity, and extensive resources to help ensure that the trust is administered according to the trust’s terms. Further, a professional trustee can help maintain family harmony by taking sole responsibility for all distributions. Corporate trustees also assume fiduciary responsibility and maintain fiduciary errors and omissions insurance coverage because they are generally examined by internal and external auditors. Trusts that last more than a few generations may be better suited for the continued stewardship of a professional trustee. Be cognizant that one person alone is unlikely to have the longevity to manage the specific lifetime needs of beneficiaries over multiple generations. Professional trustees will generally be less judgmental than family member-trustees, and do not hold the emotional ties that can become problems when family members manage a trust. On the downside, the professional trustee does not know the beneficiaries personally which can cause an information gap. There also may be oversights and mistakes due to misinformation whenever the institution acting as trustee has been acquired, merged, or reorganized.
Shared Trustee Responsibility
Some situations are best served by appointing co-trustees who share responsibilities and serve as a check and balance on each other. Of course, you’ll have to include some sort of mechanism to mediate or arbitrate disputes to deal with conflicts that might arise between the co-trustees. Professional or corporate trustees may not be as familiar with your family when it comes to knowing whether the beneficiary has a history of gambling, alcoholism, or other reckless behavior. Beneficiary requests may have to go through a committee with a large institution before being approved for distributions. With co-trustees where one is a professional trustee and one is family member trustee, you need to factor in what it would cost to have both. Professional trustees generally get paid a percentage of the assets managed, which may make them cost prohibitive for trusts of smaller amounts. Even though family trustees may be entitled to compensation for their services, they often waive their right to payment with simple trusts.
Trustee Succession and Location
Regardless of who you name as trustee, you should incorporate language in the trust that enables the client or their heirs to change trustees, if needed. Consider the optimal location for the trust administration. The professional co-trustee is often based in another state, so the clients may be able to take advantage of favorable tax and trust laws. Identify a trustee who meets your unique needs in that state. You should make sure the trustee understands how special needs trusts are administered for beneficiaries who need to remain eligible for federal and state government benefit programs while receiving trust distributions.