Trusts no longer are just for the very wealthy. Many families use trusts for a variety of reasons. Unfortunately, trusts often can result in significant problems for loved ones long after the trust creator is gone. Problems include excess costs, poor investments, low payouts, and unresponsiveness to the family’s needs. In many states, beneficiaries are not entitled to regular reports from the trust. They do not know about problems until it is too late. When beneficiaries take legal action against the trustee, the trust fund assets pay the legal expenses of the trustee.
Problems with trusts are avoidable. You have to take a few simple steps that too many people do not know about or skip.
Careful trustee selection. It is amazing how little effort many trust creators put into selecting a trustee. Too many creators appoint their estate planning lawyer or a trust company suggested by the lawyer. Many people put more effort into selecting a housekeeper. The result is that the trustee often is someone who does not know the family and is unfamiliar with the creator’s plan. In an era of frequent financial company mergers, the original trustee at a trust company is unlikely to manage the trust for long. The trust could be managed by someone in another company hundreds of miles away.
Decide what you need the trustee to do, then shop around. You need a professional trust company only if you anticipate the trust will last for years, that it needs professional management, or if complicated recording keeping and tax reporting are required. Check into fees, investment records, and customer service. Determine if you should name a specific individual or a firm.
Try co-trustees. A solution to the problems that can be caused by professional trustees is to name co-trustees. The trust company handles the records, administration, and investments. A trusted friend or family member as co-trustee has access to all the records and can catch problems when they are small. The co-trustee can have veto power over fees, investment decisions, and other key actions. He might have sole authority over distributions. One or more co-trustees can be named.
Split trustee duties. If the main reason for seeking an outside trustee is professional money management, why not split the trustee duties? Name a friend or family member as trustee with the authority to hire a professional money manager. The trustee negotiates fees, monitors investment performance, and performs administrative duties. A professional trust company could be hired to handle the records and tax returns, while a money management firm invests the portfolio. If the money manager or trust company doesn’t work out, the trustee can get a replacement.
Provide for removal. Until 1995, the tax law generally killed the tax benefits of many trusts if a trustee could be removed by beneficiaries. Now, that no longer is a concern.
Though tricky, it probably is essential to let a beneficiary or all beneficiaries acting together remove the trustee and hire a new one. Otherwise, their only option is to go to court and see trust funds used to defend the trustee.
But your reason for naming the professional trustee was to keep the beneficiaries from being able to do whatever they want with the money. You don’t want them trustee shopping to get their way. So, put limits on trustee removal. Say that it can be done no more than every five years. Or appoint a group of non-beneficiaries who can remove the trustee and select a new one.
Try a protector. This is a concept borrowed from some foreign trusts. A protector is not a trustee. But he watches the trustee’s work. The protector can move the trust to another trust company or make other key changes. Usually, complaints from the protector about high fees or other problems are enough to get things fixed. This strategy is not available in all states. It is worth considering if allowed in your state. A protector might not be necessary if you name co-trustees or provide that beneficiaries can remove the trustee.
Successor selection. Be sure the trust agreement states how a successor trustee will be selected. This is especially important if individuals are named trustees. Work with your estate planner to decide how a successor will be selected and who will do the selection.
Limit fees. Standard trust agreements say that the trustee may charge its published rates, whatever they are. You can limit the level of fees in your agreement. (Of course, not every trust company will accept the assignment in that case.) If you do not want to put a specific limit in the trust agreement, set up an approval process. Have a co-trustee, protector, or other person or committee empowered to negotiate and approve fees.
Cautions about Living Trusts. In a state with high probate costs or a cumbersome probate process (California and Florida are major offenders), a living trust to avoid probate for most assets is a good idea. But the living trust can create expensive problems of its own.
Most often the creator or creators of a living trust are the trustees. But what about successors? If the new trustee is a responsible family member or friend of the family, there probably won’t be a problem. But suppose the creators decide the trust needs professional management after them. Then, all the problems described earlier can occur. There could be high fees, poor investment performance, and other wealth destroying actions.
A living trust does not get the judicial supervision that an estate does. Without a properly written trust and careful attention to the successor trustees, your loved ones could receive much less wealth than you anticipated.
The lesson is that though set up to avoid probate, the trust lives on. Even if the trust will liquidate and distribute assets quickly after the original trustees pass, a successor trustee could do damage during that process. Pay attention to the long-term implications of the trust. Use all the trustee clauses and selection techniques already described.
Write a letter. You cannot foresee everything when writing a trust agreement. So a trustee is likely to have some discretion managing the trust and making distributions. To provide some guidance and leave a record of your intention, write a letter outlining your intentions and the actions you would prefer the trustee to take in certain circumstances.
Talk to people. The beneficiaries should understand the trust terms. That will help them quickly spot if the trustee is not doing what you expected. Talking also will let the beneficiaries know why you are leaving the property in trust instead of giving it to them directly.
Trust law litigators will tell you that most court cases have their origins in hurt feelings and surprises. If wealth is to be left for loved ones in a trust, they should know that ahead of time and be told why.
Consider mediation. In a number of states, your trust can include a clause that all disputes be subjected to mediation or arbitration. This should be faster and cheaper than litigation. If your state allows, consider adding such a clause to your trust.