Volume 8 • Issue 6 • June 2018
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. In this month’s issue, we will discuss choosing a Trustee and update an article originally drafted in October 2013. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
After consulting with your attorney, accountant, and financial advisor you have decided that a trust is the right planning tool for you. However, you are now being asked to decide who should be the Trustee of that trust. But, you have never dealt with a trust, how can you ever know who would be best? Should it be my oldest son or my oldest daughter? Should it be my nephew the accountant? As with all estate planning decisions, the right choice depends on your individual circumstances. Picking the right Trustee can make all the difference in the world. Picking the right Trustee can significantly increase the likelihood of a smooth administration of the trust in accord with your wishes. Picking the wrong trustee can lead to litigation, delay or worse. In this newsletter we will provide some ideas and concepts that can be useful in choosing the right Trustee for you.
What is a Trustee?
The first thing to understand is the role of the Trustee. The Trustee is the person who will manage the assets of the trust and make distributions to beneficiaries. More specifically, the Trustee will usually be required to preserve assets, make investments, deposit income, pay bills and taxes, prepare inventory and accountings, and make distributions for beneficiaries. Management and distributions should be according to the laws of your state and the instructions included in your trust. The trust may be very detailed in its instructions at one end of the spectrum or leave everything to the discretion of the Trustee at the other end. There are valid reasons for both. Depending on the nature of the trust, the Trustee may serve for a very limited time, a period of years, or in perpetuity.
A Trustee has a “fiduciary duty” to the beneficiaries of the trust. If you have a fiduciary duty to someone else it means that because of some special relationship, your responsibility to a particular person or persons is greater than it would otherwise be. A fiduciary obligation does not demand absolute perfection in judgment, but it does demand absolute loyalty, honesty, and disclosure, even if that disclosure hurts. Justice Benjamin Cordozo (a former United States Supreme Court Justice) stated:
Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A (fiduciary) is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions. . . . Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. . . .
What are my options?
Often, where possible/ legal, and reasonable, you or you and/or your spouse are the initial Trustees of the trust while you are both alive and have capacity. The surviving or non-incapacitated spouse will often continue to serve when the other spouse becomes incapacitated or passes away. However, when it is not legal, advisable, or possible for you or your spouse to serve, you must look to another to fill the role of Trustee. Generally, Trustees are selected from one of two different categories: individual non-professional Trustees or professional Trustees.
Individuals. A common option is appointing an individual who is personally close to you. This is often a family member, a son or daughter, a brother or sister. It also may be a trusted friend. If an individual is selected, he or she should be someone who is trustworthy, impartial, and responsible. The Trustee should be an individual willing to honor your wishes. The Trustee should be someone capable of handling investments and business affairs. If an individual cannot balance their own checkbook, the mere fact that you really like them should not tip the scale in favor of appointing them as Trustee. The duties of a Trustee are very time consuming, so the individual needs to have sufficient time to carry out his or her duties. The Trustee should be a person not easily swayed by pressure or criticism, yet capable of diffusing difficult situations. Two factors that are completely irrelevant in choosing a Trustee, yet often seem to work their way into the discussion, are gender and birth order. A person is not qualified to be a Trustee simply because they are the oldest or they are the oldest son. In the modern age it is much easier for a Trustee to be located far from where the trust assets are located, but, administration can be more difficult for one who does not have ready physical access to trust assets.
Appointing an individual might result in lower fees if the individual is willing to serve without compensation. However, service without compensation may be unfair because a Trustee’s duties require a substantial time commitment. Unless otherwise skilled in asset management, an individual is generally a poor choice as a Trustee of a trust with assets of any significant size. This is because they often fail to follow all of your trust instructions and because they lack knowledge about trusts, experience, desire, or time. These problems may lead to improper trust investments and distributions or refusals to distribute, an absence of accountings, failure to pay taxes owing, and ill will among family members. Individual Trustees are often much more likely to bend to unwarranted threats of litigation. While jealousy sometimes exists between family members when one person was selected over another, for anyone who has actually served as a Trustee, they will tell you it is not an easy job.
Professional Trustees. Often a better option is appointing a professional Trustee. A professional Trustee is often a bank, brokerage, or independent trust company. In some jurisdictions, accountants, attorneys and financial advisors can also provide these services. A professional Trustee is usually much better than an individual at following your instructions. A professional Trustee can almost never be influenced to make improper distributions, improperly withhold distributions, or invest assets imprudently. A professional Trustee often has the benefit of attorneys, accountants and others on staff to assist with the administration. A professional Trustee offers the advantages of long experience in trust administration, investment expertise, and provides detailed regular accountings to beneficiaries of the trust assets and transactions. In addition, if a professional Trustee makes a mistake, it should have ample assets to restore the loss in addition to being bonded and insured.
A professional Trustee tends to be more expensive in terms of fees and will often require an annual fee based upon a percentage of the value of the trust assets. The percentage is often based on a sliding scale and generally decreases as the value of the trust increases. However, the amount saved in bad decisions, delay, and other wasteful processes can often more than offset these costs. A professional Trustee will allow you to avoid placing the family members in an adversarial situation. The value of the assets involved and the nature of the assets involved will affect whether a professional Trustee is willing to accept the responsibility for your trust. This should be investigated prior to naming a professional Trustee. Some worry that a professional Trustee will be too sterile or detached and not concerned with the needs of the family. One option would be to name a trusted individual to serve as co-trustee alongside the professional Trustee. In this instance, the trust should be very clear on their respective roles. Additionally, having a family council to oversee and advise the professional Trustee on the wishes of the family can be very beneficial. One last thing to consider is naming a trusted advisor as the “Trust Protector” capable of removing the Trustee. If a professional Trustee can be “fired” in this fashion they will have a greater incentive to deliver the services you are expecting.
In conclusion, whether you are creating a simple living trust that will distribute everything outright when you die, or you are creating complex irrevocable trusts that will span generations, the choice of the Trustee is a significant one. Whether it is an individual or professional, sufficient time should be spent investigating the capacity and willingness of potential nominees to the office of Trustee. If you have already created your trust, do not forget to review and update the Trustees when necessary.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.