This article will help you understand the various considerations that may come to bear on your decision to designate an appropriate trustee for your trust and help you to consider variables that most persons who set out to implement their estate plan do not think about. Carefully considering the variables discussed here will help you to make the correct trustee designation and provide the peace of mind you should have when you trust your trustee.
When designing an estate plan to provide for the financial well-being of loved ones, either during one's life or thereafter, a trust instrument can be an effective way to maximize the benefits for all the interests involved. However, just as a poorly drafted trust instrument can undermine the effectiveness of the estate plan, so too can a hastily chosen trustee. Therefore, when implementing a trust instrument, you should spend as much time and effort thoroughly considering the designation of your trustee as you do choosing an attorney to draft the instrument in which the trustee is designated.
But designating a trustee to manage your family's financial affairs in the future should not cause anxiety or reconsideration of your plan. Rather, choosing a trustee should be an exercise of assurance and peace of mind that your estate plan for your family will be carried out.
Generally, there are five elements required to establish a trust. These include:
- Grantor (sometimes referred to as a “settlor”)
- Corpus (sometimes referred to as the “principal” or “res”)
- Beneficiaries (qualified as “income” or “remainder” beneficiaries)
- Purpose (expressed by intent of the grantor; may be directive or precatory)
- Trustee (responsible for administering the trust)
The person who establishes the trust is referred to as the “grantor” or “settlor.” The grantor establishes the trust by designating property as the “corpus” of the trust, which is the property in the trust that is invested or managed and possibly distributed to persons or entities named in the trust. Those persons or entities named in the trust are “beneficiaries.” Beneficiaries who receive income from the investment of the corpus are qualified as “income beneficiaries,” and those who obtain an interest in the corpus of the trust when the trust terminates are “remainder beneficiaries.”
The purpose of the trust is to implement specific estate planning objectives for the future. These objectives are expressed within the terms of the trust and may be expressed in the form of mandatory directives or precatory wishes. In either case, it is the legal, fiduciary duty of the trustee to carry out the purpose of the trust by managing and administering the trust according to its terms and in a way that benefits the beneficiaries.
In addition to the directives expressed in the terms of the trust, the trustee is subject to the statutory rules that govern the administration of trusts, called the rules of “prudent investing.” A trustee may be subject to personal liability if he or she fails to satisfy or intentionally breaches these rules. Considering that the duties of the trustee are complex and wrought with conflict, it is critical to the success of your future estate plans that you designate as trustee someone who exemplifies the skills and qualities necessary to effectively carry out the purpose of the trust. In short, you need someone you can trust as trustee.
To choose a trustee you can trust, consider the following questions:
There are a number of options when choosing a trustee. The most common type of trustee includes a:
- Family member (spouse, adult child, sibling)
- Professional (attorney, CPA)
- Trust company
But not every option is right for every estate plan or every estate planner. For some, the first option may be for the grantor of the trust to serve as trustee.
For many persons planning a trust instrument that is effective during life (called a “living trust”), the best option may be for the grantor to serve as the trustee. In this way, the grantor retains control over the trust. The only limitation is that a grantor serving as the trustee may not be the sole beneficiary, which would create a merger of present and future interests and, thereby, terminate the trust. However, the grantor could serve as trustee if a co-trustee is appointed.
To retain complete control, the grantor could require that the decisions of the grantor are binding and controlling upon all co-trustees. The trust could include an indemnification clause for a co-trustee who dissents to any of the grantor's decisions as trustee that might otherwise subject the co-trustee to liability. Note, however, that such an indemnified co-trustee would still be subject to fiduciary liability for failure to exercise reasonable care to avoid a breach of trust by another trustee.
Even when a grantor serves as trustee for a revocable living trust, there are any number of reasons why the grantor may be unable to continue to serve in that capacity:
- Unwilling because of the burden of trustee duties
Thus, even a grantor who self-appoints as trustee should designate a successor trustee upon circumstances under which he or she cannot, or chooses not to, continue serving as trustee. Thus, the remaining categories of possible trustees should be considered.
It is natural that the person you trust the most is a family member, such as a spouse, adult child, or sibling. One of the main benefits of choosing a family member as a trustee is that a family member may be disinclined to demand a fee for his or her service. Because trustee fees are taxable to the trustee, but bequests to beneficiaries are not, a responsible child named as a beneficiary may be less likely to demand a fee as trustee. However, as described in this article, serving as a trustee can be demanding and require a significant dedication of time and attention to detail. A family member — even a dedicated adult child — who devotes the time necessary to serve as trustee can soon become resentful of the burden and decide to charge a reasonable fee. At this, other family members or beneficiaries can become resentful or suspicious that another relative is receiving money from the trust. Often, this can create a “no-win” situation.
Even if providing a fee for service is not an issue, you still must choose a family member who possesses the skills necessary to administer and maintain the trust. In considering this, ask yourself the following questions:
- Is this family member trust-worthy?
- Is this family member organized?
- Is this family member good at record-keeping?
- Is this family member financially responsible?
- Does this family member understand financial investing?
- Does this family member understand the fiduciary duties of a trustee?
- Is this family member willing and able to assume liability for a possible breach of fiduciary duty, even if by another trustee?
- Does this family member understand me, my family, and my goals, or have a bias for or against me or any specific family members?
In answering these questions, it is important to remember that although appointing a trustee is a very personal matter, this is a business decision and must be based on business considerations. Although your child or sibling may be the person you trust most completely, if he or she does not possess the skills necessary to effectively administer your trust, then he or she may not be the appropriate person for the job, or at least his or her duties as trustee should be expressly limited to the personal, rather than the financial, decision-making aspects of the trust.
Designating a close, trusted friend as trustee offers similar advantages and disadvantages as designating a family member, therefore, the same questions should be considered. Appointing a friend may eliminate the tension among family members that may arise by appointing one family member over others, but appointing someone outside the family can cause similar resentment among family members, particularly those named as beneficiaries. If you appoint a friend, it should be someone whom the beneficiaries also trust and with whom they are in agreement to serve as trustee. A friend appointed should have some familiarity with the family and beneficiary relationships and be able to exercise discretion when discretion is called for.
If designating a family member or friend is not the best option, you might consider designating a professional who is familiar with your family and your estate, such as an attorney or certified public accountant with whom you have worked in the past. Experts in the field observe a “growing pressure on amateur trustees to yield to professionals.” Although such professionals will charge a fee for their services, their fees likely will be less than those of a trust company, and there is less likelihood of litigation arising because of a claim raised by a resentful beneficiary. Having a trusted professional serve as trustee brings a sense of objectivity to what can sometimes call for subjective decision-making. A professional may be more likely to adhere to the wishes of the grantor without being influenced by self-interested family members.
You must also consider, however, that a professional serving in the capacity of a trustee could face a potential conflict of interest in his or her role as your attorney or CPA. You should consider that possibility and discuss the consequences with the professional before making this designation. Also, even though professionals may be more objective than family members or friends and have more experience with trusts and related financial matters, they still may not possess all of the expertise necessary to administer a trust of a more complex nature and may have to delegate duties to other experts. The added expense of delegation may offset the cost benefit of choosing a professional to serve as trustee.
If a trusted professional is not an option, it is common to designate a bank (with a trust department) or trust company as trustee. According to Professor John H. Langbein, one of the leading scholars on the Uniform Prudent Investor Act, “[p]rivate trustees still abound, but the prototypical modern trustee is the fee-paid professional, whose business is to enter into and carry out trust agreements. These entities thrive on their expertise in investment management, trust accounting, taxation, regulation, and fiduciary administration.”
After the market crash of 2008, individuals tend to question the strategies and competencies of the corporate investor. But according to Professor Langbein, “the professional portfolio managers are not incompetent bunglers, indeed, just the opposite. They are so good at what they do that they effectively cancel each other out.”
Thus, although using a bank or trust company may be more expensive than a familiar professional or family member, trust departments of banks and trust companies will have the management expertise and experienced personnel qualified to handle a trust of any complexity. Corporate trustees should be entirely objective in carrying out the wishes of the grantor and will be less likely to meddle in the distractions of family drama, which so often accompanies the administration of a trust. If you anticipate family tension, a corporate trustee may be the prudent choice.
The continuity of management over a long period of time that a corporate trustee offers also may be important for more complex trusts involving future interests. However, there are practical aspects of trusts that must be considered before appointing a corporate trustee. For example, a surviving spouse may not appreciate having to deal with a corporate entity to access income or distributions of his or her own property. And when decisions of a more personal nature arise during the evenings or on weekends, a corporate trustee may not be as readily available as a family member or friend. In light of the likely expense of a corporate trustee, the advantages and disadvantages of corporate service should be carefully considered.
The nature and complexity of your trust may dictate your decision whether to serve as the trustee during life, to appoint a family member or friend, or to appoint a corporate trustee. For simple trusts or small estates involving the direct distribution of estate property upon death, an expensive corporate trustee may not be necessary. Consider, too, that corporate trust entities, which often are paid by a percentage of the corpus of the trust, may not represent small estates or estates involving assets that may be too administratively burdensome to manage, such as trusts involving:
- Residential rental properties
- Family-owned businesses
- Real estate located out-of-state
For trusts involving these types of assets, it may be prudent to involve a family member in the management of the trust. Likewise, for trusts involving highly personal decisions, family members may be necessary, such as for:
- Special needs trusts
- Discretionary trusts
- Spendthrift trusts
For example, a corporate trustee may not offer the personal involvement or insights that may be necessary to make decisions about a disabled uncle, the educational needs of a child, or the drug-addiction manifested by a spouse or sibling. When such personal issues are involved, the benefits offered by a corporate trustee may not be necessary or valuable.
For irrevocable asset protection trusts, grantors will not want to self-appoint as trustee because the retention of such control often will prompt the distrust of family members, consideration of the doctrine of merger, and fraudulent transfer litigation. Likewise, for the common joint A-B trust involving surviving spouses, appointing the surviving spouse as trustee can appear akin to a general power of appointment that affords sufficient control over the assets of the trust such that the property is deemed part of the estate and, thereby, defeats the estate tax plan benefits for which the trust was created.
In the end, there is no magic formula or equation by which to identify the appropriate person to appoint as trustee. A trust that includes a multi-million dollar stock portfolio derived from family-owned businesses is going to require different management skills than trust property that includes 200 acres of farm land. And a trust designed to provide for a child's future education or special needs is going to demand greater personal and familial insight than managing the tax consequences of a decedents' estate. The nature and complexity of the trust to be administered often will dictate the trustee you appoint.
The duties of a trustee can be demanding. Specific duties may be varied and prescribed by the terms of the trust. But there are two primary rules that all trustees are bound by fiduciary responsibility to follow:
- Benefit the beneficiary
- Satisfy the intent of the grantor
Unfortunately, these two, simple directives can be quite conflicted. Thus, to carry out these obligations, there are mandatory duties that are statutorily prescribed to all trustees, which help the trustee to balance these interests and avoid liability for a breach of duty to either category of interest. These are called the “prudence” rules or the “rules of prudent investing.” These generally include:
- The duty to manage and administer the trust
- The duty to be loyal
- The duty to be impartial
- The duty to invest prudently
- The duty to invest prudently
The prudence rules for trustees are state specific, but for the most part, they are generally the same in every state and for every trust and trustee. As a general matter, all trustees must effectively:
- Safeguard, invest, and distribute assets
- Maintain proper and accurate records
- Provide proper disclosures of accounting
- Pay taxes
- Maintain real estate and businesses
- Make decisions of liquidity
- Pay expenses
- Resolve beneficiary disputes
- Defend legal claims
- Outsource responsibilities
- Make discretionary decisions
As you can see, even for the simplest of estates, the scope of the duties of a trustee are significant. Although you might feel compelled to appoint “Aunt Maria” as trustee because you trust her implicitly, and because she likely will not demand payment for her services and she sends your children birthday cards every year, if Aunt Maria does not possess the skills and experience necessary to carry out these tasks, then you probably should consider someone else to serve instead of, or in addition to, Aunt Maria.
Whether you designate “Aunt Maria” as your trustee or consider the trust division of your local bank, the trustee you appoint will be statutorily obligated to fulfill these other fiduciary obligations as trustee:
As discussed above, one of the primary fiduciary duties owed by the trustee is the duty owed to the grantor — to fulfill the grantor's wishes and carry out the purpose of the trust. Thus, the trustee must be loyal to the intent of the grantor. Unless expressly authorized by the grantor in the terms of the trust, or by the statutory rules of prudence, the trustee may exercise no discretion to administer the trust in a manner that is contrary to the grantor's intent.
For example, if the grantor specifically instructs the trustee to invest only in socially-conscious businesses with specific ideologies, the trustee may not invest otherwise, even if it is more financially viable to pursue other investments. Even if a limitation placed upon the trustee is the result of poor or boilerplate drafting, the trustee in limited by the terms of the trust.
The duty of loyalty also includes the duty to avoid self-dealing — what is sometimes referred to as the “sole interest” rule. The trustee may not participate in, or benefit personally from, the administrative dealings of the trust, such as by purchasing property that he or she determines to sell from the trust. This can be a tempting proposition, particularly for a family member serving as trustee for the administration of family property. Liability for breach of this fiduciary duty can be costly. However, as Professor Langbein puts it:
Compliance with trust fiduciary law is ordinarily not onerous. The prudent investor rule is profoundly protective of trustees who have followed common investment-industry standards. The duty of loyalty … is also easy enough to obey in ordinary cases. It says to the trustee, You are left with the entire universe of investment possibilities as outlets for your entrepreneurial impulses; you are required only to stay away from the trust assets when you seek your own fortune.
The other primary responsibility of the trustee is to benefit the beneficiaries. However, the terms of the trust very often direct for certain named beneficiaries to receive income from the trust during their lives (“income beneficiaries”) and for other beneficiaries to receive the corpus of the trust when the trust terminates (“remainder beneficiaries”), and these interests often naturally conflict. For example:
- When making investment decisions, should the trustee invest aggressively, so as to maximize the potential income for the income beneficiaries, despite the risk to the preservation of the corpus and the interests of the remainder beneficiaries?
- Or should the trustee invest conservatively, so as to preserve the corpus of the trust for the remainder beneficiaries, despite the loss of potential income to the income beneficiaries?
- When income is received by the trust, how shall the trustee allocate that income between income and remainder beneficiaries, or among similar beneficiaries?
Modern rules designed to reconcile such conflicts, such as new, statutory “unitrust” provisions, provide some guidance. However, from the beneficiaries' perspective, the trustee is bound by fiduciary obligation to all, but also obligated to maintain impartiality toward each. Breach of either of these duties may subject the trustee to liability. Choosing a trustee who can negotiate these decisions is critical to the success of your estate plan.
The general rules of prudent investing require the trustee to do just that — invest trust property prudently, subject to the terms of the trust and the best interest of the beneficiaries. In the modern market, this involves the many complexities and intricacies of “portfolio management,” for which, as described above, corporate trusteeship has become the norm.
In satisfying the rules of prudent investing, it is important that the trustee be able to consider and weigh the beneficiary factors that are pertinent to making prudent decisions, as well as those factors that influence the trustee's decisions, such as:
- Divorce proceedings
- Drug addiction
- The accumulation of debt
- A personality of risk-taking or risk-aversion
Often, the prudent investment decision is one in which the perspective of the trustee and the perspectives of the beneficiaries are the same. Thus, in choosing a trustee, you must also consider the factors that affect the beneficiaries.
As stated by Professor Langbein:
Trusteeship entails three relatively distinct functions: investment, administration, and distribution. Investment includes not only the initial selection of securities or other assets, but also the tasks of monitoring the investments for continuing suitability, investing new funds, and voting the shares. Administration includes the range of accounting, reporting, and tax filing. … Unusual trust assets may require other administrative work — maintaining and leasing real estate, insuring and safekeeping the Picasso and the diamond tiara, and so forth. Distribution … requires interpreting and applying the sometimes complex language of the trust instrument; and it commonly involves contact with the current beneficiaries, in order to keep abreast of their needs and circumstances.
Every trustee is obligated to exercise their expertise in fulfilling each of these duties. However, often, Aunt Maria has no more expertise in the investment of stock portfolios or the maintenance of Picasso paintings than the expertise a trust adviser at First Corporate National Bank may have on the needs of a physically disabled child or the statistical probability of a drug relapse for a 17-year-old adolescent.
To reconcile the dilemma created when the terms of the trust require decision-making in areas for which the designated trustee has no expertise, one possibility is for the grantor to authorize the trustee to delegate that decision to someone who does possess such expertise. Another option, is for the grantor to delegate those duties by appointing co-trustees for the trust.
1. Delegating duties
The grantor has the option to appoint “co-trustees.” This can include a personal and corporate trustee. In this way, First Corporate National Bank can exercise its expertise in investing and managing the corpus of the trust to earn income for the named beneficiaries, but Aunt Maria, who understands nothing of investing but is intimately familiar with the circumstances of the family and the needs of the beneficiaries, can determine the most appropriate time and conditions to distribute those funds to the beneficiaries.
Likewise, even for the administration of a garden-variety trust, in the terms of the trust, the grantor can delegate specific duties to specific co-trustees and, thereby, allow the investment banker to exercise his or her investment expertise, but still allow family members to retain control by reserving in Aunt Maria (or even the beneficiaries) the power to approve or disapprove of specific investments.
It is also common to appoint joint spouses as co-trustees and delegate decision-making authority to one spouse while delegating the minutiae of detailed administrative duties, such as check-writing and record-keeping, to the other spouse, if that is how each spouse is so inclined or skilled. This is an ideal but often overlooked solution when one spouse or co-trustee is partially incapacitated and cannot carry out specific functions but needs to be involved in other aspects of the administration of the trust.
When appointing co-trustees with distinct functions, it is important to be specific about the investment assets that are delegated to the corporate trustee and other financial assets that are delegated to the private trustee. Other personal financial assets may include:
- Non-investment assets and bank accounts
- Family business interests
- Personal property
Because the fees of corporate trustees are often based on a percentage of the corpus of the trust that is administered, limiting the assets over which the corporate trustee has authority — in this case, only the assets to be invested — may allow you to minimize the value of the trust upon which the corporate trustee's fee is based and, thereby, minimize the expense of appointing co-trustees.
When decision-making authority between co-trustees is equal, it is important to denote in the terms of the trust a method for resolving decisions in which unanimous or majority agreement cannot be achieved. Options for resolving “ties” might include:
- Appointing an odd number of co-trustees
- Designating tie-breaking authority to the beneficiaries
- Appointing a “trust protector” to make final decisions
Under such conditions, a window of time during which decisions are not made and tensions are high may transpire. Thus, it is best to resolve this co-trustee issue when originally delegating your trustees, rather than after a standstill occurs.
When resolution by co-trustees is unattainable, or when administration by a sole trustee is unworkable, the unproductive trustee may be removed. There are endless circumstances that might produce such a need. Most commonly:
- An existing trustee does not render satisfactory services
- A trust advisor familiar with the family retires or merges with a trust company less sensitive to the family's needs
- An existing trustee becomes incapacitated
- An adult child serving as trustee becomes overwhelmed with the obligations of the position or the frustrations of family squabbling
- The relationship or communication with an existing trustee is disagreeable or unworkable
Removal is most efficiently accomplished through the terms of the trust. For example, the grantor may afford the beneficiaries the authority to remove a disagreeable trustee upon a unanimous vote. A similar power may be afforded to a beneficiary surviving spouse. However, as with the appointment of a surviving spouse as the co-trustee of a joint A-B trust, affording too much removal authority to a spouse could affect the estate tax plan purposes of the trust. You might consider restricting a spouse's authority to remove a trust to removal “for cause” rather than simple dissatisfaction with the distributions that the surviving spouse is receiving.
When affording beneficiary authority to replace an incapacitated trustee, you might consider waiving the requirement of a physician's statement of incapacity, whereas physicians often are disinclined to provide certification of such a condition. However, when doing so, you must clearly express an alternative method of determining incapacity, on which others can rely.
As this article suggests, there are numerous considerations that go into choosing an appropriate person to serve as the trustee of your trust, but there is no agreed-upon formula for success. The primary considerations always should be honesty and trust, even before skills and experience. If you do not feel comfortable with a corporate trustee administering your estate and making decisions on behalf of your family, then all the skills and the experience in the world will not accomplish your goal of confidently providing for the needs of your family. But if you trust “Aunt Maria” to provide for the best interests of your family according to your wishes, then the skills and experience necessary for her to do so can be delegated and acquired. But you cannot buy trust. This is why your decision to designate a trustee is one of the most important decisions you will make when executing a trust.
We hope the questions and considerations provided in this article help you to choose a trustee with the qualities herein discussed:
- Willingness to serve
- Financial astuteness
Few people possess all of these characteristics, but if you can designate a trustee who exemplifies most, or even some, of these qualities, this is likely a trustee you can trust.