The decision to protect your life’s work and wealth, and to make sure it is properly maintained such that it can provide for your loved ones in the years to come, is an easy decision. But bringing that decision to action is more complicated that simply drafting a trust. And too often, well-intended settlors come up short in the execution. In the following article, we discuss, briefly, some considerations in both selecting the proper trustee and arming that trustee with the tools to succeed.
Corporate Trustees:
By and large, corporate trustees typically offer an elevated level of knowledge and experience in managing – and in some instances navigating – the myriad obligations and complexities of trust administration. This includes the ability to competently invest and manage the assets of the trust, while adhering to modern portfolio theory regarding investment methodology. Importantly, a corporate trustee will generally have a strong working knowledge of the intricacies of applicable law in the prevailing jurisdictions in which your trust assets and obligations exist. The full service / vast experience structure of a corporate trustee makes it an attractive option for many settlors.
However, the very structure that makes a corporate trustee the perfect choice for some, may prove to be too conservative or inflexible for others. Internal policies may make corporate trustees unable to accommodate certain assets or trust responsibilities. Corporate trustees may also seem more institutional; they may lack a “personal touch” and/or adequate level of sensitivity and empathy for the beneficiaries they serve. This may be particularly true with institutions with high turnover among personnel, where there is seldom an opportunity for the development of a relationship between the trustee and the beneficiaries.
Finally, when considering a trust service that includes both administration and asset management, care should be taken to understand the potential for conflict inherent in some compensation structures. For instance, an organization compensated on a percentage of assets under management may be slow to act when making distributions from trust principal (which, of course, reduces the value of assets under management).
Attorney as Trustee:
Many settlors prefer to appoint trustees with whom they have a professional, yet personal, relationship. In many instances, this can be the family attorney. An attorney can be an excellent choice as your trustee if the attorney has adequate experience in all aspects of trust administration (including an adequate understanding of trust accounting and tax obligations), and is familiar with the law in the jurisdiction(s) in which your trust is administered. This later point cannot be stressed strongly enough. Many, if not most, of the attorneys who prepare trust documents for their clients do not have an adequate level of experience in the day-to-day operations aspects of trust administration; particularly when it comes to tax and accounting
functions. When selecting an attorney as trustee, make certain the attorney works with the proper team of professionals, including a certified public account and a certified investment advisor.
It is also important to understand that when an attorney is acting as a fiduciary – as a trustee – his or her errors and omissions policy does not provide coverage to the trust estate. What that means is if the attorney is negligent in administration of the trust and if that negligence causes injury to the trust (and beneficiaries), there may not be adequate protection. When appointing an attorney as your trustee, it is a best practice to purchase a trustee liability policy that specifically covers the trustee and the trust assets.
Certified Public Accountant as Trustee:
A Certified Public Accountant (CPA) with experience in trust administration can be an excellent choice as a trustee. A qualified CPA will have the ability to accurately track investments, maintain books and records, and file all requisite tax returns. The CPA will understand the intricacies of trust accounting and asset distribution and will be best positioned to steer you clear of tax other accounting errors that can harm the trust. When selecting a CPA as your trustee, you should ensure the CPA is aligned with a team of professionals required to properly administer the trust (a certified investment advisor and a qualified legal advisor).
When considering whether to retain a CPA as trustee, confirm the CPA has the necessary “people skills” required to be a successful trustee. The hourly rate of the CPA should also be taken into consideration.
Family/Friends:
In many, if not most instances, a trust settlor’s primary goal in appointing a trustee is to select a person who will administer the trust according to the settlor’s intent and in the best interests of the trust beneficiaries. In many instances, the default trustee is a family member or close family friend; someone who has a personal relationship with the settlor and the beneficiaries. Often times the appointed trustee is honored to have been selected and proceeds with the best of intentions. But the reality is, in most instances the family friend is the least qualified person on earth to administer your trust. Such a trustee likely has: no understanding of the obligations or personal risk of being a trustee; no experience in trust administration; no experience investment advisory responsibilities; no understanding of applicable tax laws or accounting principles; and no understanding of the general laws of the jurisdiction in which the trust is held.
Importantly, the moment your family member or close family friend assumes responsibility of being the trustee, that person assumes personal risk for any loss the trustee can be deemed to have negligently caused through action or inaction while acting as trustee (fiduciary).
If you are inclined to appoint a family member or close family friend as trustee (or if you have been asked to be a trustee), it is critically important you take three critical steps to protect your trustee (or yourself if you are asked to be trustee), as well as the trust assets and the beneficiaries for whom the trust was created:
1. Secure a trust liability policy that provides fiduciary protection for your trustee, as well as reimbursement protection for your trust assets;1
2. Get a full understanding of the trust, the assets in trust, and the administrative obligations of the trust (e.g., what assets is the trustee responsible for managing and where are they, to whom does the trustee owe a duty, and most importantly, what is the trustee actually required to do and when is the trustee required to do it);2
3. Retain the professional services required to properly administer the trust (e.g., investment advisory services, accounting services, tax services, legal services, etc.). 3
Co-Trustees:
For those who want to have their cake and eat it too – that is, for those who want access to the professional services of a corporate trustee, but the close personal touch of a family member or family friend – many organizations offer what is known as a Co-Trustee relationship. In a Co-Trustee relationship, the corporate trustee handles the administrative duties of the trust, including record keeping, investing, tax filings, legal interpretation of the trust terms and quarterly meetings to keep the beneficiaries informed. The family member or family friend trustee provides guidance to the corporate trustee about the needs and issues of the various beneficiaries.
Trust Protectors:
It may prove difficult to identify individuals willing to assume the fiduciary duties that come with being a trustee, even when compensation is not an issue. In such situations, you might have the trust documents specify the position of trust protector, which originated with offshore asset protection trusts.
Ideally, the trust protector should be an individual with knowledge of the risk factors present in the trust and the intentions of the settlor who created the trust. The trust protector can offer advice to the trustee(s) regarding decisions affecting the trust beneficiaries. The trust protector can also be empowered to remove and replace trustees within the parameters set forth in the trust. Such power provides an excellent incentive for the trustee to responsibly administer the trust on behalf of the beneficiaries, in accordance with trust terms.
A trust protector can also serve as a tie-breaker when 2 co-trustees are deadlocked regarding a decision affecting the trust and other beneficiaries. This serves as a check on a corporate trustee, who once appointed, will be loathe to surrender annual management fees they receive from the trust.
Of course, much will depend upon the size and the asset mix of the trust in question. Thus, it is imperative to review these options with the counsel you retained to draft your trust. The more information your counsel has, the better job counsel will do drafting the trust and the happier the beneficiaries, and you the Settlor, will be.
Conclusion:
A trust is an excellent tool for allowing one to pass on wealth and security from one generation to the next. But a well-crafted trust is only part of the equation. Settlors should take a holistic approach to setting up a trust, one that includes making sure to draft the right trust language and select the right trustee, and making sure the trustee is armed with the tools, resources, and protection needed to succeed.