Your Most Important Estate Planning Decision – Executors and Trustees – Part 2

Selecting a trustee is one of the most important decisions in Estate Planning. Last month we began a discussion and focused mostly on whether your trustee should be a professional (usually a bank or trust company) or an individual. This month we’ll discuss ways you can structure the trustee’s duties and relationships to increase the probability of achieving your estate planning goals. (While this discussion focuses on trustees, many of the strategies also apply to executors.) You’ll find that you might not have to choose between a professional trustee and an individual. Here are some strategies to consider.

Estate Planning Decision #1

Try co-trustees. Professional trustees and individual trustees have their own sets of advantages and disadvantages as we saw last month. You might be able to capture most of the advantages and minimize the disadvantages by naming co-trustees. There are different ways to structure a co-trusteeship.

The trust company might be the primary trustee, handling records, administration, and investments. A trusted friend or family member as co-trustee has access to all the records, reviews them, and tries to catch problems when they are small. You could give the co-trustee veto power over fees, investment decisions, and other key actions.

When the trustee has discretion over the timing and amount of distributions, that is the most likely source of problems, discord, and disagreement. One option is to give the non-professional trustee sole authority over distributions. Another is to have multiple co-trustees decide the distributions and perhaps require unanimity before a distribution is made. These are only a few ideas. You can structure things however you believe will work best, though you might have trouble finding a professional trustee to accept too many limits on its role.

Estate Planning Decision #2

Split trustee duties. Another way to get the best of both worlds without some of the complications of co-trustees is to split trustee duties. You could have several trustees, with each responsible for a different function. Or you can have one trustee who hires professionals to perform some of the duties. There are many ways to split duties.

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 handling 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. In some trusts, the first two sets of duties are handled by one professional trustee and a non-professional decides on distributions and other matters. Or you could have multiple trustees perform one of the functions together. For example, distributions often are a source of conflict. You could name two or three family members, friends, or advisors to be a committee of co-trustees and have to agree on all decisions.

Perhaps the simplest approach to splitting trustee duties is to name one or more individuals as co-trustees and specifically empower them, and perhaps encourage them, to hire professionals under them for administration, tax reporting, and investing. In this case, the professionals technically wouldn’t be trustees. They’d be hired by the trustee. The person appointed trustee would be responsible for determining and making distributions and any other matters.

Provide for removal. Things change. This is especially true of banks and trust companies. There are numerous mergers and acquisitions. It’s not unusual for a trust to be administered by a firm very different from the one that originally was named trustee, though it is a legal successor to the original firm. Also, an individual trustee you liked and really were naming could move on to another firm or another role in the same firm, leaving the trust in the hands of someone who knows about you and your family only through the file. The new trustee could be located hundreds of miles further away. Those examples are for professional trustees, but of course individual trustees have many potential changes. For these and other situations, you want to have a process for removing or changing a trustee.

The beneficiaries will be the continuing players in a trust, and have the greatest stake in good trusteeship. So, you might want to create circumstances in which beneficiaries could change the trustee.

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, when they aren’t happy with some aspect of the trust management their only option is to go to court, and that means the trustee can use trust funds to defend itself.

The trick is that you set up the trust and named a non-beneficiary as trustee 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 say the beneficiaries can remove a trustee, but a group of non-beneficiaries select a new one so it isn’t completely in the hands of the beneficiaries. Talk with your estate planner about options.

Estate Planning Decision #3

Try a protector. This is a concept borrowed from some foreign trusts and is becoming more popular in domestic trusts. A protector is not a trustee. But he watches the trustee’s work. He has access to and reviews all records and actions. 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 your state recognizes a protector. 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 in case a trustee is removed or is unable to continue performing and who will do the selection.

Estate Planning Decision #4

Limit fees. Standard trust agreements say that the trustee may charge its published rates, whatever they are. You can limit the fees in your agreement. (Of course, not every trust company will accept the assignment in that case.) Instead of a specific fee limit in the trust agreement, you can set up an approval process. Have a co-trustee, protector, or other person or committee empowered to negotiate and approve fees.

Estate Planning Decision #5

Cautions about living trusts. In a state with high probate costs or a cumbersome probate process, 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 trust agreement names 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, for at least a while. Even if the trust will liquidate and distribute assets quickly after the original trustees pass, a successor trustee could do damage. Pay attention to the long-term implications of the trust. Consider all the trustee clauses and selection techniques already described.

Estate Planning Decision #6

Write a letter. You can’t foresee everything when writing a trust agreement, and not everything you want can be put in 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 intentions, write a letter outlining your goals and the actions you would prefer the trustee to take in certain circumstances.

Estate Planning Decision #7

Talk to people. One reason trusts cause problems is the law in most states still doesn’t provide for beneficiaries to see the trust agreement, automatically have access to records, and other rights.

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.

Estate Planning Decision #8

Consider mediation. In a number of states, your trust can include a clause requiring all disputes be submitted to mediation or arbitration. This should be faster and cheaper than litigation. If your state allows, consider adding such a clause to your trust.

Estate Planning Decision #9

Require extra reporting. Basic trust law doesn’t require beneficiaries to be told much. In fact, in a traditional trust the trustees aren’t accountable to or reviewed by anyone. It can be a hassle for anyone to obtain the basic records of trust activity.

Consider specific reporting requirements in the trust agreement. Perhaps you want regular reports (which can be simply copies of bank and investment account statements) sent to adult beneficiaries and guardians of minor beneficiaries. You also could have reports sent to knowledgeable outsiders, such as your estate planning attorney, accountant, or key family members. Reports should be made annually at a minimum, and probably less comprehensive but more frequent reports would be better.

RW September 2014.