Making Your Most Important Estate Planning Decision – Choosing Your Trustee

The success of your Estate Planning often is determined by the choice of trustee. The importance of that choice isn’t discussed often or fully enough. Many estate plans now include one or more trusts set up for various purposes, so this is a vital issue for most people.

A trust is managed and administered by the trustee, often with little or no oversight. The best-drafted estate plan is little good when it isn’t implemented well. Mismanaged trusts 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, compounding the problem.

When your estate plan has one or more trusts, spend a lot of time choosing the trustees. The choice is at least as critical as the structure of the plan and the terms of the trust. Problems with trustees are avoidable. You need to take only a few simple steps that too many people do not know about or skip. In this month’s visit we’re going to discuss choosing between a professional trustee (such as a bank or trust company) and one or more individual trustees. Next month, we’ll discuss trust provisions and structures of the trustee’s job that can improve minimize problems, even when the choice of trustee isn’t ideal.

Estate Planning Decision #1

The basic choices for a trustee are a family member, a family friend, an advisor (such as a lawyer or accountant), or a professional trustee (such as a trust company). Each has advantages and disadvantages. The best choice for trustee depends on the purpose of the trust and sometimes its details and family dynamics.

Family and friends can be best as trustees when the purpose of the trust essentially is to transfer assets over time to children or grandchildren. The job of the trustee is to preserve the trust principal, distribute enough to maintain the standard of living of the beneficiaries, and transfer the principal to the beneficiaries when they are old enough.

In this case, you want the trustee to be someone who knows the family. A family member of friend is likely to know the appropriate life style to support and also have some idea of what you would want in different situations. The investment decisions for this type of trust often are straightforward.

Most attorneys recommend that in this situation the trustee not be among the people with custody of the beneficiaries and the responsibility for taking care of them. That could create conflicts of interest.

What if a trust holds complicated or illiquid assets, such as real estate, a family business, or a valuable collection? You’ll probably have trouble finding a corporate trustee to serve, unless the assets are very valuable and the trust is willing to pay premium fees. These assets require ongoing active management with special knowledge and expertise. Most trust companies don’t have the expertise. At best they’ll agree to be trustee but will hire a consultant, at the expense of the trust, to help make decisions.

This is another situation when you’re likely to need a trustee from among family, friends, or professional advisors.

Estate Planning Decision #2

When considering a non-professional trustee, there are several qualities the person needs.

Of course, the trustee should have the financial expertise and any other knowledge needed to manage the assets. The exact qualities needed depend on the assets in the trust, how long the trust will last, and your investment goals. When your family business is in the trust, you need someone who knows the business well and has the experience to oversee its management, even if someone else does day-to-day management. A trust that contains traditional investments, such as mutual funds and stocks, needs less specialized expertise but needs someone who will either manage the portfolio well or seek good advice.

The trustee also needs non-technical skills. Most trusts give a trustee at least some discretion over the amount of money to distribute. A beneficiary, or the beneficiary’s guardian, often asks for additional distributions, and the requests can become frequent and discussions heated. A trustee might need to patiently explain why additional distributions are not being made, either because they would violate the trust terms or would in the trustee’s view not be in the beneficiary’s best interests. The trustee also needs to be able to make these decisions without being influenced by past feuds, biases, or other personal history.

When you suspect these conversations could be frequent, choosing a non-family member probably is the best idea. You want someone who is familiar with the family but who isn’t a member, so intra-family relations won’t be harmed by the trustee’s decisions.

Estate Planning Decision #3

Professional trustees have their advantages. When a trust has complicated terms, a professional has the support to be able to administer it properly. A professional trustee has accounting systems, tax advice, and efficient custodial services that sometimes are necessary or helpful.

Another advantage of a professional trustee is continuity. The professional trustee tends to be a corporate entity, so it will survive any individual. Professional trustees are regulated, having their books and practices periodically reviewed and audited. Professionals also are likely to have deep pockets that can be tapped if the trustee acts improperly and costs the trust money.

There can be disadvantages. A professional (whether a bank, trust company, financial advisor, or someone else) isn’t likely to have the family knowledge that may be helpful. A corporate trustee also could have frequent personnel changes that make it less likely after a few years the individual acting as trustee will have much family knowledge or even firsthand knowledge of you and your intentions. If that kind of knowledge is important, a professional trustee is a disadvantage.

Whether you select a professional trustee or someone else, plan on compensating the trustee for all but the simplest trusts. Being a trustee is a lot of responsibility and involves keeping records, filing tax returns, investing assets, and making distributions. Most trustees receive a fee of about 1% of assets annually, though the rate declines as the value of the trust assets increases.

Estate Planning Decision #4

The best option in many cases might be to choose both professional and non-professional trustees. In some trusts, co-trustees have to agree on all decisions. In other trusts, co-trustees have separate duties and have sole authority in their areas.

There are three main areas over which the trustee duties can be divided: administration, asset management, and distributions. You could choose a corporate trustee to keep the records, prepare the tax returns, and hold custody of the assets. An investment manager could serve as co-trustee and handle only the investment decisions. A friend, family member, or professional advisor could be a third co-trustee who decides how much to distribute and makes any other decisions. The first two sets of duties could be bundled in one professional trustee, and the non-professional could decide on distributions and other matters while overseeing the professional trustee.

Estate Planning Decision #5

When you choose a professional trustee to handle some or all of the duties, be sure to shop around. Qualifications, expertise, expenses, and personnel vary widely in the industry. You want the trustee to be a good fit for your trust and loved ones.

Next month we’ll further discuss strategies for structuring the trustee relationship that will enhance your estate plan and increase the safeguards for your wealth and loved ones.

RW August 2014.