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Strategies to Protect Your Estate Plan

Last update on: Jun 17 2020
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What’s the biggest problem with most estate plans? Often it is not taxes or cash flow. Many times the biggest problem is the trustee or executor that was appointed to carry out the estate plan.

Trusts usually are a key part of the estate plan. How the trustee administers the trust determines the quality of the estate plan. Unfortunately, there are many ways a trustee can destroy a solid plan.

A key problem in recent years is fees. Often no fee limits are placed in the trust agreement, allowing the trustee to increase fees at will, which some have done.

Investment performance also can be a problem. A bank trustee might feel obligated to hire the bank’s mutual funds or asset managers to handle the trust’s investments, resulting in high fees for mediocre performance.

Also, there can be overnight changes in the trustee. In the rapidly-changing financial services industry, your local bank can be swallowed up by a series of larger banks. Soon, someone who never knew you and doesn’t know anything about your family is managing the trust with 250 others. There’s no way that trustee (who probably won’t stay in the job more than two years) can know your preferences or what is best for the family.

Once you are gone, your family really has no say in how the trust is managed. After all, that is one of the reasons trusts are created in the first place. The beneficiaries aren’t supposed to have discretion. But the beneficiaries also have few options if the trustee performs poorly. Courts generally aren’t willing to change a trustee unless the trust agreement specifically allows it. Also, the trustee can use trust assets to pay for its defense against a suit. Some legal reforms are under way, but they aren’t in place yet.

For the trust to work, you have to set things up right in the first place. Here’s what to do.

  • Don’t make the trustee choice an after-thought. Usually, at the end of the Estate Planning process, the attorney asks who should be trustee. The trust creator hasn’t thought about it. Then the nod goes to a bank suggested by the attorney or one that has the creator’s accounts.Give the trustee as much thought as the rest of your plan. Interview several trust companies. Ask how they communicate with beneficiaries, how they make decisions about distributions, what kind of personnel turnover you can expect, and, of course, what the fee schedule is. Also check into how they will invest for the trust.

    Look beyond traditional trust companies during the search. Major brokerage firms and some mutual funds now actively seek this business and have active trust subsidiaries .

  • Appoint a co-trustee. Corporate and bank trustees have many advantages. They have the infrastructure to efficiently administer the trust and do the taxes. But they might not know what is best for your family or know your preferences. You can appoint a co-trustee who is a family member, friend, or professional advisor. The co-trustee has the power to prevent expenditures and investments. You also can empower the co-trustee to approve fee changes or even change the corporate trustee. You can appoint one or more co-trustees.
  • Split trustee duties. You can hire a corporate trustee to handle administration. Then provide for someone else to handle the investments. You can pick a firm or adviser you like. Or you can appoint a co-trustee or committee to handle the investments. Be sure fees are separated for the different functions.
  • Limit fees. There’s no reason for your trust not to put some kind of limit on fees. Perhaps there will be some trust companies that won’t want the work. But most will. A good option is to have someone other than the corporate trustee, such as a co-trustee or a committee, approve fee increases.
  • Provide for removal of a trustee. Amazingly, most trusts don’t give anyone the power to remove trustees. That was partly due to IRS rules, but the rules were changed in 1995.You probably don’t want beneficiaries having the power to change trustees. That might defeat the original purpose of the trust if the beneficiary could shop for a friendly trustee. If you do give the beneficiary the power to change trustees, limit the power so it cannot be exercised more than once every five years, and the new trustee has to be the same size or larger than the current trustee.

    But you might prefer to have the corporate trustee chosen by a co-trustee or a committee. If these people are familiar with both your wishes and the beneficiaries’ needs, an appropriate trustee is more likely to be selected.

  • Write a letter. A trust agreement cannot cover all circumstances, because you cannot foresee everything. If a trustee has some discretion in handling the trust and making distributions, you might want to leave a letter that outlines what your intentions were and the actions you would prefer the trustee to take in certain circumstances. Those instructions might be helpful to the trustee when hard decisions or unexpected circumstances arise.These steps add extra work to your estate planning, but they will make a big difference to your heirs and to the success of the plan.

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