Most of us have Living Trusts because we understand that this allows us to avoid costly probate fees, and to direct the disposition of our assets after our deaths. This is important even in the simplest of family structures, but it becomes particularly critical in blended families and more complicated family structures.
But who do we designate as the Trustee to carry out the terms of the Trust? However simple or complex the estate plan, the choice of an inappropriate trustee can cause the goals of the plan to fail completely.
The tasks assigned to a trustee are powerful and complex. Yet so often, we choose our oldest child, regardless of their abilities, or all of our children, refusing to acknowledge that there are conflicts between them that will become apparent when the parents are no longer around. In the case of blended families, the situation only becomes more complex.
Here are some of the questions that you should be asking yourself about your successor trustee:
1. Does the trustee possess the knowledge and experience to be able to perform the duties of trustee? Even though the trustee usually has professionals to help in the tasks, the ultimate responsibility is still that of the trustee.
2. Is the trustee charged with administering the trust also a beneficiary? This is very often the case when a child is named trustee. Will that person, with an inherent conflict of interest, be able to act independently in the interests of ALL of the beneficiaries? If you name two or more co-trustees in an attempt to resolve this issue, will they be able to work together or will the administration result in inevitable conflict?
3. Will the Trustee be paid? There will always be professional fees to be paid in connection with trust administration, for the preparation of tax returns and for the management of the trust financial assets etc., but depending on the size of the trust, it may be that considerable time and effort is involved with information gathering and trust administration.
4. Where is the proposed trustee located? If the trustee is not geographically close to the assets, it may be harder for them to be managed efficiently. There can also be tax considerations to the choice of trustee. For example, the choice of a California resident for a trust that has no California assets will result in the trust having a tax filing requirement in California.
5. Professional trustee or family friend/family member? The above questions presuppose the choice of a family member or close family friend as a trustee.
The choice of a family friend or family member may be advantageous in that this person will have a better knowledge of family dynamics, but it is also quite possible that the individual may be influenced by trust beneficiaries and may have their own conflict of interest. It is also more likely that the individual will be lacking in the knowledge required to administer the trust, and that this person may find that the task is just too burdensome, when they presumably have their own individual family and work responsibilities. Most non-professionals who take on the job of executor or trustee express surprise at how time-consuming the responsibility is, even in the simplest of situations.
If you are considering a professional trustee, there are two main alternatives: a professional private fiduciary, or a corporate institutional trustee.
A private fiduciary may be necessary in situations in which there are known family conflicts. Many private fiduciaries have backgrounds in psychology, social work and mediation that may be invaluable in these situations. Private fiduciaries are required to be licensed and must fulfill certain educational and experience requirements. Attorneys and CPAs can act as trustees without the licensing requirement, and sometimes the CPA or attorney may be the right person. However, there are times when even they may not be equipped to deal with the task. Special needs trusts or issues that arise during lifetime with incapacity are examples of situation which may require someone with different skills.
A corporate trustee will likely be the choice in a situation in which the trust is of substantial size or when it holds complex assets, such as major real estate. A corporate trustee is by definition a neutral party and may help minimize family conflicts, and the choice of a corporate trustee should ensure that the trustee is knowledgeable about the various legal and tax issues relating to the trust. A corporate trustee will generally be held to a higher standard of care than an individual trustee. On the downside, a corporate trustee can be viewed as insensitive to family issues and dynamics, and sometimes an institutional trustee may actually reject the trust administration because there are assets that it does not handle or terms in the trust that it does not agree with. A corporate trustee will generally be more expensive than an individual trustee, although trust administration will always require some professional assistance.
There is no correct answer for the choice of trustee. It is quite clear, however, that there are many issues to be considered, and sometimes it is necessary to look beyond the most obvious choice to find a solution that might really enable your estate plan to be realized.