Private Advisory Group

Selecting the Right Trustees

Posted by Steve

The inherent benefit of a trust as keeping your estate out of probate after your death has made trusts more popular than ever. Many people understand that trusts are different than a standard will, and some people simply want a trust because of the implied sophistication.

There are two approaches to drafting a trust. The first is drafting as directed, which means that much thought is put into crafting the metes and bounds of the trust to circumscribe the trustee’s behavior and decision-making process. The second is trustee directed, which means selecting the person who is most likely to carry out the purpose of the trust and who will avoid mismanaging or abusing the flexibility of the trust. The second option is typically used to draft trusts for children.

As trusts become more and more popular, the need to select the right trustee or trustees becomes more important as trusts are only as successful as the trustees who manage them. Many clients understand their own business model far better than they understand a trust. Therefore, it’s important to hire competent and experienced help when you are designing a trust and designating the trustees.

Family or Friends as Trustees

When a trust is designed to manage money left to children or grandchildren, choosing a relative or a close family friend can seem the first most logical option, but stop. Consider that when small children are involved, it is important to choose someone familiar with the family environment in which the child is living to continue the child’s care. This is widely understood as the least confusing option as this person is in the best position to maintain the child’s lifestyle and familiar patterns. This trustee, however, should not be the same person who is assigned the responsibility of maintaining the trust. If this sounds contradictory, consider this: the person caring for the child or children will not be the most objective person to care for the trust as they have a built-in conflict of interest.

Selecting a family member doesn’t always mean that family member is the most capable, but they do bring knowledge of family history and circumstances to the situation. Of course, old family hurts and unsettled issues can be brought to the table as well and those may create a poisonous situation.

It’s important to remember that acting as a trustee is more of a job – it takes work – and less of an honor. If the trust consists primarily of real estate, choosing a relative or close friend who is not involved with the direct care of the child also makes sense. Those assets may require ongoing and active maintenance that would take time and energy away from the person responsible for the child’s care. This is why trustees – even those who are family members – should be fairly compensated for their efforts.

Professional Trustees

Large and complex trusts are better run by a team of professional trustees. These trustees may be an independent trust company or financial adviser, but they are always an objective professional responsible for maintaining the trust. There are a number of benefits to choosing the professional trustee route in addition to objectivity – the first of which is that professional trustees have a better range of experience and updated resources on which to call. Professional trustees are also less likely to get involved in family disputes relative to the trust.

Some of the drawbacks to professional trustees are:

• Lack of family context. For example, if a beneficiary asks for an extra distribution and the family knows this person has a gambling problem but the professional trustee does not, the trustee may inadvertently feed the addiction. Of course, well-designed rules for distributions can ease that lack of knowledge.
• Lack of direct contact. In some cases, professional trustees are less responsive to beneficiary requests, particularly when they are managing a number of trusts.
• Professional trustees can be more expensive as they usually earn a percentage of the value of the assets plus fees for additional services. In some cases, the cost is worth it to get the job done properly.

To get the best of both worlds and tap into the benefits of each, grantors may choose a family member and a professional trustee to serve as co-trustees. Each co-trustee has different responsibilities with regards to the trust, and they can balance the work while taking advantage of their basis of knowledge and skills. Institutional trustees are examined by federal and state authorities and they have internal audits, so they have some built-in accountability that isn’t implemented on friends and family trustees.

Choosing the Right Trustee and Safeguarding the Trust

You may not get it right the first time. Choosing a trustee should start with careful screening. Candidates should be carefully interviewed to understand how they would handle certain matters. Their fees and resources should be examined, and all of this is true whether they are family or not.

The right trustee may not be the first you thought you’d choose. Indeed, trustee decisions are not designated once and then cannot be changed. Things change, divorces happen, and you may decide later to change the trustee or trustees. Your trust can be designed such that a trustee can be removed and a replacement option will be readily available to fill the void. This ensures that if a trustee misbehaves or is no longer considered as trust-worthy as they once were, they can be removed and their successor can quickly fall into place.

To safeguard the trust, be sure to require regular reporting as transparency is the key to ensuring mismanagement doesn’t occur. Most trusts report at least annually, but more frequent reporting can be established. Another useful safeguard is to choose bonded trustees. Therefore, if the trustee does steal you can seek restitution from the bonding company. Another safeguard can be to hire an independent trust protector to mediate family and trustee disputes.

Of course, the best protection for a trust is carefully planning from the start. A competent attorney specializing in trusts can be your best ally in designing your trust and choosing the right trustees to manage it. You can read more about selecting trustees at Financial Advisor Magazine.