By: Martin M. Shenkman, CPA, MBA, JD
Martin M. Shenkman, CPA, MBA, JD
Selecting a trustee is a tough decision, but the concerns you may have over potential candidates can often be mitigated by naming additional fiduciaries, and including provisions in the trust document to address those concerns. These steps can make the selection process less difficult or worrisome.
The Decision Struggling over who to put in charge of Junior’s treasure trove? The most important decisions you will have to make in completing an estate plan is choosing a trustee to manage the trusts you establish. Whether the trust is for yourself, your spouse, or other heirs, the control a trustee can wield makes the decision daunting. You need to identify someone with the integrity to carry out the job appropriately, the sensitivity to deal with the beneficiaries, and the sophistication to deal with tax, legal and other complex matters. What non-tax factors should you consider in choosing a trustee? What steps can you take to mitigate the concerns you have that a trustee may not have all the requisite attributes, or even if he or she does that he or she may not perform as expected? How can you plan your trust to mitigate the worries over trustee selection? Careful planning and drafting can often address the concerns you have with this decision.
Role of a Trustee The trustee you designate will be charged with managing the trust, and implementing your wishes as expressed in the trust agreement. Trustee responsibilities vary, depending on the nature of the particular trust. However, there are duties which are common to most trusts. These include investing trust assets, making distributions to beneficiaries, coordinating investment decisions and distributions to current and future beneficiaries, recordkeeping, filing trust income tax returns, and communicating with beneficiaries. A clear trend in trust planning is to opt for longer term trusts, such as trusts that last a lifetime, or even perpetual trusts. The difficulty of the tasks and time periods faced by trustees are compounded by the tremendous diversity, even hostility, amongst heirs. Identifying a perfect trustee is almost impossible. If you view the decision in a broader sense of the flexibility and controls a trust can provide over trustee selection and trustee actions, the decision becomes more complex, but often much easier to make.
Switch Trustees Sometimes different people are appropriate for different phases of your trust. Name an initial trustee, and when a child of yours matures to a specified age, he or she can join the existing trustee as a co-trustee. On an insurance trust you might name your long time accountant as trustee while you are alive. On your death, when the insurance proceeds are collected, the role of trustee changes from more of an administrative role to one of investing and distributing funds to your children. The trust agreement could state that a new trustee takes over at that time.
Name a Co-Trustee Name two trustees to serve together as co-trustees. Each trustee provides a check and balance on the other. Each trustee can bring different skill sets to the trust management function. One might be compassionate and empathetic towards the beneficiaries, while the other brings investment and other technical expertise.
Name an Institution There is a clear trend toward more frequent use of banks and trust companies as trustees. They can provide the objectivity and professionalism that Uncle Joe may just lack. A common approach is to name a family member as co-trustee with an institution. The institution can provide investment management and administrative services so that there is less imposition on the family member who likely has her own family, work and other responsibilities. This approach permits the family member focus on bringing the personal touch you want, while the institutional co-trustee bears much of the work and responsibility. If the trust you’re forming is long term (lifetime or perpetual), institutions provide the certainty of having a trustee for the duration.
Delineate Distribution Objectives More Clearly Most trust documents use rather generic language for what should be distributed. That language is often based on tax and asset protection considerations, often tempered by your wishes for more control or certainty. Distribution provisions do not have to be limited to legalese. You can provide some level of detail as to the distributions you want in order to more clearly guide the trustees as to the lifestyle you want for the beneficiary (e.g., summer camps, and overseas travel), or that you don’t want (e.g., no purchase of airplanes, or boats). You can specifically authorize a trustee to use trust funds to buy a house for a beneficiary. Reasonable detail can mollify worries over the trustee not distributing funds in the manner you wish.
Define Investment Parameters more Explicitly Too many trusts simply default to standard language mandating that a diversified investment portfolio be held as mandated under the Prudent Investor Act. Many trusts simply provide that state law governing investments can be ignored. That could be acceptable, or disastrous, depending on the circumstances. If you tailor the investment provisions more carefully, the decisions as to who manages the trust investments can be less difficult to make. For example, if you have a family business, you could authorize the trustee to hold that business without regard to diversification requirements. You could even provide parameters as to when the business can be sold (e.g., no heir is working in the business for a period of two years). You can create sub-trusts under the trust, with one trust holding family business interests and the other trust being invested in accordance with modern portfolio theory. Reasonably limiting and guiding what investments can and cannot be made can provide greater assurance that whoever is serving as trustee will carry out your investment wishes.
Name Additional Fiduciaries Dividing up trust functions amongst additional fiduciaries responsible for specific roles that are thus removed from the purview of the trustee can often solve the dilemma of who to name as trustee. You can name a trustee, but still carve out the investment role for a person or institution that has great investment expertise but is not appropriate to serve as a trustee. You can remove the distribution decision from the trustee and name a separate distribution committee. You can name a trust protector and grant specified oversight powers to him (e.g., change the institutional trustee). A combination of trustee, investment adviser, distribution committee and trust protector, each with specified powers and responsibilities, can often provide a structure to address the reality that you may not be comfortable vesting all power in a single trustee, or that you don’t have anyone who can alone fulfill all the roles required.
Empower the Beneficiaries to Replace the Trustee Give the beneficiaries a right to replace the trustee. In many cases this may be limited to replacing an institutional trustee with another institution. The threat of replacement can often do wonders to assure a more attentive trustee. This power, however, should be tempered to avoid empowering beneficiaries to trustee shop for the trustee who will simply do their bidding however inappropriate.
Name an Independent Guardian When setting up a trust for a minor in your will, consider naming one person as trustee and another as guardian to provide checks and balances. Perhaps the guardian can serve as co-trustee with an independent trustee, so that the guardian doesn’t avoid scrutiny.
Write a Letter of Instruction Not everything belongs in a legal document. Details as to the lifestyle you want an heir to live might best belong in a personal, non-legally binding side letter to the trustees. These in depth personal instructions can be invaluable to a trustee trying to speculate as to the decisions you would like made under different situations. Providing personal guidance to a candidate who has the integrity, compassion and ability to serve as a trustee, but lacks the personal knowledge of your heirs, may solve your concerns.
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