Choosing the Best Trustee for You and Your Loved Ones
Perhaps one of the most crucial decisions you will ever make involves choosing the individual to manage your financial matters in the event you become incapable of doing so yourself. This individual, commonly referred to as the successor trustee, plays a pivotal role in overseeing your trust, executing your will as an executor or personal representative, and acting as your designated attorney-in-fact in your power of attorney. The successor trustee typically possesses extensive discretionary powers, as they hold legal title to assets in trust on behalf of beneficiaries, ensuring that the trust's objectives align with the grantor's original intentions.
The Trustee's Role: Navigating the Complexities of Trust Administration
A successor trustee's responsibilities can vary greatly depending on the nature of the assets held within the trust. Managing a diverse portfolio of investments or a closely held business interest, for example, presents distinct challenges compared to overseeing a trust holding a single commercial property or a mutual fund. However, the trustee can always seek expert advice from investment professionals or other specialists when needed.
Understanding the Trust's Purpose
From the outset, the successor trustee must thoroughly familiarize themselves with the trust's provisions and any accompanying documents, such as the grantor's personal directions letter. This letter, often attached to the estate plan, can offer invaluable insights into the grantor's intentions, goals, and specific considerations for each beneficiary.
Building Relationships with Beneficiaries
To effectively administer the trust, the successor trustee should proactively engage with the beneficiaries. Initial interviews can help the trustee understand individual circumstances, goals, and needs, enabling more personalized decision-making. Additionally, the trustee should assess whether the existing trust assets align with the trust's requirements and the beneficiaries' best interests.
Fulfilling Fiduciary Duties
Accepting the role of trustee means committing to upholding the grantor's wishes as expressed in the trust document. If a potential trustee disagrees with the grantor's intentions or finds them at odds with their own beliefs, it's best to decline the position. The trustee's primary responsibilities include:
Identifying, protecting, and managing trust assets
Paying expenses and maintaining adequate insurance
Filing all required tax returns
Distributing trust principal and income as directed
Prioritizing Financial Responsibility
It's crucial for the trustee to understand that they can be held personally liable for unpaid trust debts if distributions are made to beneficiaries before settling these obligations. This underscores the importance of meticulous financial management and prioritizing the payment of taxes and debts before any distributions occur.
Trustee qualifications
Many clients often choose to designate their child or the guardian of their minor child as the successor trustee, which can entail a significant long-term commitment. For instance, overseeing assets for minor children until they reach ages like 25 or 35 involves a substantial time frame. It's crucial to weigh the implications of having a single sibling controlling the inheritance of a brother or sister. Will disagreements over life choices lead to strained family ties if discretionary distributions are withheld?
In cases where a guardian has physical custody of a minor, concerns may arise about whether the child's trust funds are appropriately allocated for household needs. Assigning a trustee to manage finances and assess expense requests for the beneficiary's well-being could be prudent. As we mentioned earlier the successor trustee doesn't necessarily need to possess financial expertise, as they can enlist professionals for guidance.
Trustworthiness, honesty, and a commitment to fulfilling trustee obligations are essential qualities in a successor trustee. If there's a family business involved, consider whether individuals working in the business could serve as successor trustees. While having the beneficiary act as the successor trustee may sometimes be suitable, it could decrease asset protection and lead to adverse tax implications if the beneficiary aims to shield assets from estate taxes or income tax liabilities.
The professional trustee
The first concern when a professional trustee is considered is typically the cost. Family members or relatives are generally considered to be able to keep family matters and finances private and save money. However, neither assumption is necessarily true.
As to cost, some trustees will bill for the services performed at an hourly rate that is much lower than typically charged by an attorney. Despite what you may see on television with celebrity estates such as the Michael Jackson estate, most lawyers do not act as professional trustees. This is for at least three reasons:
The lawyer would make more money working on other matters
There may be a conflict of interest precluding the lawyer from acting as a lawyer and trustee
The lawyer might not find serving as a trustee as enjoyable due to the minutia of detail and disputes or negotiations on minor matters between beneficiaries and others
Many professional trustees will charge a percentage based upon the value of the estate per year, such as 1.0% or 1.2% of the value of trust assets, though perhaps a higher percentage for smaller trust estates and a smaller percentage for larger trust estates. However, the size or value of the trust estate is not always the best indicator of the amount of actual work required. If the trust provisions are simple and the asset composition does not require a lot of oversight or effort, then the percentage may be a high price despite the fact that it is only 1% or 1.2% of value.
Care should be taken when using bank trust departments because a bank will often move all liquid or semi-liquid assets into bank investment products. That may not have been the wishes of the grantors, who may have wanted the trust to continue with the existing financial professionals. The bank will typically charge for that transfer, so they are charging the trust for the privilege of the bank making more money during the trust administration. Many banks will not wish to handle real property or manage active business interests.
The use of a professional trustee can also mean a loss of control by family matters. If the trust administration is of short duration, then this issue may not be as great a concern. Detailed trust provisions and/or a personal directions letter from the grantors of the trust can minimize this concern.
Some families want the trust administration to be as easy as possible for all family members. Serving as a successor trustee can be a lot of thankless work performed for beneficiaries waiting only for the trustee to “pay them the money.”
Sometimes a Trustee’s role will be Needing much work with little thanks.
Take for example, years ago, I represented a client who found herself in the challenging role of successor trustee for a vast estate. This estate wasn't just your typical stocks and bonds situation; it included multiple apartment complexes and a diverse array of other assets. The client, a financial planner, was chosen for her impeccable track record and her reputation as the most responsible member of her family.
However, the responsibility she inherited was far from simple. The apartment complexes, while fully occupied, lacked any written rental agreements. We were left in the dark about rent amounts and faced numerous code violations, including dangerous illegal gas stoves in some units. The situation worsened when renovations revealed toxic mold, forcing us to relocate many tenants at the trust's expense.
The complexity of administering this trust was immense. Due to its size, we made early distributions to beneficiaries whenever funds became available. However, despite my counsel, the trustee delayed seeking compensation until the very end of the process. By that point, beneficiaries had grown accustomed to these distributions, and the sudden cessation—due to the trustee's rightful fee—caused conflict. Some beneficiaries, including the trustee's own mother, contested the fee, which was ultimately upheld by the court.
This case serves as a stark reminder: acting as a trustee is rarely a walk in the park. It's a role fraught with responsibility, demanding decisions, and often, little gratitude. It's important for anyone considering the position to fully understand the potential challenges and seek professional guidance to navigate the complexities of trust administration.
A professional trustee can be very helpful for beneficiaries receiving needs-based governmental benefits. There are many rules regulating what are permissible distributions, and a professional often has many tips, suggestions and alternatives that can empower the special-needs recipient to live a more independent life (for example, using prepaid debit cards of controlled amounts).
A family member may serve as an investment trustee to manage the trust investments, while the professional trustee can act as the administrative trustee to oversee distributions to the special-needs beneficiary and compliance with the governmental agency’s reporting and other requirements.
The foreign trustee
Foreign trusts (trusts with a situs or business location outside of the United States) are subject to very high income tax and other filing requirements. The “business address or situs” of the trust is where the trustee resides. Selecting a trustee living in Canada, Mexico or another location outside the United States can trigger a foreign trust classification and the higher reporting requirements. Professional advice should always be obtained, as the penalties for failure to properly report can be substantial.
One way to help minimize that risk is to include language in the trust guaranteeing that trust assets would always remain under the jurisdiction of a state court within the United States. You may wish to utilize a state such as Nevada, which does not have a state income tax for its residents. The successor trustee would need to live in that jurisdiction for that to be effective.
At Rankin Law Firm, LLC, we recognize the complexities of trust administration. Our experienced estate planning attorneys can guide trustees through their duties, ensuring compliance with legal requirements and the fulfillment of the grantor's wishes. Contact us for expert support in navigating the intricacies of trust management.