SELECTION OF TRUSTEES
The following is a discussion of the use and type of various trustees. It
covers many significant topics that a trustor (the one establishing the trust)
should consider, but it is imperative on an individual to personally interview
several potential trust companies and trustees to insure that the selection
addresses not only competency, but someone who the trustor feel comfortable
with and who believes will understand and will carry out the trustor's needs
and desires. The family's financial planner should be included in the selection
process- and possibly the attorney and CPA as well- since they are an integral
part of planning team. Remember, a good portion of one's financial life-
and the responsibility therewith- will be given to an "outside" entity, so
a trustor must do thorough homework to pick intelligently. Do NOT trust any
entity with money unless there has been a complete investigation of the firm
and individuals that will handle the assets.
There are two types of trustees- corporate and individual. Both have their
place depending on the size of the trust, skills required and a host of other
issues. If picked correctly, it should put one's mind at ease. By the same
token, irresponsible selection of trustees by trustors has led to reckless
and incompetent behavior, lost funds and a breach of fiduciary responsibility.
SELECTION OF TRUSTEES
As stated elsewhere, a trust is established for a variety of reasons. Outside
of the possible tax advantages and the opportunity to avoid probate, the
trust is primarily a management vehicle that allows a trustor
to release control of assets to a trustee when 1) they no longer want to
manage due to other pressures, 2) when they are incapacitated or 3) upon
the trustor's demise.
There are four alternatives trustees that can be utilized in establishing
a family trust:
1. The surviving spouse or children
2. A corporate (institutional) trustee such as a bank or trust organization
3. An unrelated person
4. A combination of all three
The selection process depends on 1) the personal desires of the individuals
establishing the trust, 2) the confidence level of the trustor in the ability
of the individual trustees as compared to an institution, 3) the ages of
the trustors and 4) the personal reasons of the trustors. Universally, it
is the emotional reasons that determine who will control the assets.
Unfortunately, it is also that same reasoning that causes many trusts to
end up with incompetent trustees. Picking a trusted friend to babysit your
children is one thing- picking that same individual to manage several hundred
thousands of dollars of assets over a period of time is an entirely different
matter.
INSTITUTIONAL OR CORPORATE TRUSTEES
Most research has indicated that the institutional trustee is the preferred
choice since the trustees have managerial ability, independence from influence
from beneficiaries and almost total neutrality from the personal problems
that are prevalent at the time of distribution. These and other relevant
issues are discussed below.
1. The first consideration that may not be readily apparent is whether or not the banking institution- even of national prominence- is really sure they want to be in the trust administration business or are simply there for the purpose of being able to represent that they have trust services available.
In the latter case, the service is set up more as a public relations ploy
and/or as a profit center rather than the significant organizational dedication
to service in the areas of estate planning and trust administration. Hopefully
through the interview process or with discussion of several trust companies,
the true picture of the company becomes apparent.
2. Corporate trustees are usually considered for larger estates- say $400,000
or more- and when complicated matters are involved. There are several advantages.
One of the major benefits of corporate trustees is that they don't die or
become disabled. Therefore there is permanence of the trust COMPANY. However
remember that this does not, quite obviously, guarantee that the same TRUSTEES
will be acting for the corporate entity. Employees can change rather rapidly-
therefore a trustor MUST review employee turnover, how long the head of the
department has been with the bank, and particularly what background the trustees
are required to have. I have had one trust with turnover of at least 200%
per year- and a major institution at that. Additionally the background of
each has been highly suspect. This should be a primary focus in the selection
process- but rarely is.
The in-depth experience of the individual trust officer who will be assigned the task of administering trust assets should be examined to insure the trust relationship will be maintained on the highest professional level. Certain questions such as the length of experience, designations, time at the specific bank, number of accounts personally monitored, perhaps a full employment history are all relevant. Equally important is how well the trustors and beneficiaries may get along with the trustee. It is suggested, even demanded, that one meet with the trustee at least on a semi-annual basis- perhaps even quarterly- to be sure the direction of your investments is maintained. Unless someone is watching the store- even in the biggest of institutions- the errors may go unannounced. Further, I submit that it is MANDATORY that the beneficiaries review such accounts with an INDEPENDENT THIRD PARTY consultant at least every year. Such review may cost $250 to $5,000 with very large estates, but if the account size is over $400,000 (the minimum usually required by most trust departments), the review is well worth while. Look at it as "insurance" against default. One should not unilaterally give anyone or any money without a thorough and continuous review. I have seen too many situations where no one checked on the trustee's activities at all and the investments suffered greatly.
Another reason for professional overview is that state statutes may allow the portfolio to be invested in such a way that does not maximize potential. Some states simply retain assets received from a grantor and effectively do not change the diversification since they are not required to. Hence improperly designed portfolios are apt to be retained in such character.
3. The corporate trustee is accountable for negligent performance. Most courts therefore have required the posting of a bond for the performance of their duties. Additionally, most institutions carry a significant amount of extra insurance in the event of inappropriate conduct by any of its officers. How much is enough, how well they are insured and the stability of the organization may be indicated by the size of the institution. Some institutions may self insure and the larger the institution is, the more stability may exist within the institution to handle such matters.
Just remember, the amount of insurance does not signify competence.
4. Corporate trustees can remain impartial to the children. Individual trustees
who are friends or relatives of the heirs can be put into an extremely tenuous
personal position. Pressure by beneficiaries may coerce the individual trustee
into making too many errors to the benefit of those applying pressure. A
corporate trustee should be relatively immune to such suasion.
5. There is the general consensus in many articles that corporate trustees
have greater investment expertise, tax and accounting abilities and computer
expertise. It is here where I find some of the studies to be severely flawed
since I am not sure who may have authored such studies- possibly those with
debatable skills at analyzing a trust. After personal experience with bank
trusts and through other discussion with other advisers and beneficiaries,
I now have a significant avoidance to the use of bank trustees because the
actual investment expertise tends to be severely limited. And since such
trusts are usually not established for less than $300,000, it is imperative
that the trustees have established themselves as investment professionals
and attained the background as CFA's or at least have one on staff at the
larger institutions.
It is not necessary however that the investment decisions be made by the
trustee. In some cases the trust company may act solely as the custodian
of the assets with all investment decisions made by the beneficiaries- where
many are limited in expertise. The trust company merely executes the various
transactions and maintains records. Obviously the next arrangement is where
the trust company suggests the investments that would be of best interest
to the estate and beneficiaries with the final determination left to the
beneficiaries. And lastly is where the trust company makes and executes all
decisions. Skill and knowledge are required throughout in order to keep the
liability exposure at acceptable levels.
6. As a part of the reporting process, corporate trustees will normally provide
adequate and current reports on the activities of the trust. As with all
reports however, it is still the responsibility of the trustor or beneficiaries
to read them.
7. Fees are normally much higher under a corporate trustee than with an
individual. They may charge, in part, for 1) Investment Management Service,
2) Personal Tax Service, 3)Trust Management Services, 4) Estate Settlement
Service and 5) Custody Service Annual Safekeeping Fees. There will usually
be minimum fees as well so it's best to check around and compare. And as
repeatedly stated, it is imperative that the account be reviewed annually.
Several banks have lost suits where they have raised fees without notifying
the beneficiaries.
8. The geographical location is also a hidden element that deserves critique.
Clients may feel estranged from the trust company if they have to travel
long distances or go into a downtown area from the suburbs. Admittedly this
is an emotional issue, but when added to all the other variables, it can
have a considerable impact since I suggest personally visiting the trustees
at least once a year.
9. If the account is relatively small, the trust company may require that
funds be invested in the various mutual common funds they make available.
For large estates, outside selection of individual stocks and bonds as well
as other mutual funds may be purchased. Also be aware that the trust company
is not empowered to maintain the stocks and bonds of a new account. They
may sell, regardless of tax consequences, the previous assets held by the
family and invest them as they see fit. If they take the responsibility,
they make the decisions.
INDIVIDUAL TRUSTEE
Individuals are very often chosen since they are relatives or friends of
the grantor. But as stated above, the primary selection of these trustees
is apt to be solely on a emotional level- not on capabilities. And it is
for that reason that many trusts have poor performance. But if a trustee
is selected on the basis of education and financial acumen as well, several
benefits are available which are discussed below.
1. Individuals, particularly spouses and children, may not charge trustees
fees (meaning they COULD, but opt not to) and hence considerable monies can
be saved versus corporate entities. However, this can cause more problems
than it solves. If one child serving as trustee has to spend untold hours
on the workings of the trust, he/she may feel that the other children are
getting a free ride- in most cases a true statement.
The trustee may feel emotionally obligated (and burdened) to carry out the
duties since it was the desires of the deceased, but hard feelings may ultimately
emerge. How well will these desires be accomplished under these circumstances?
Perhaps poorly. And in too many instances, it can lead to bickering and
bitterness in the family. While the other children may feel the trustee is
merely fulfilling a family obligation, some (perhaps most) of their concern
is simple greed. Obviously this is not an easy situation, but the following
may put the situation in focus: "You get what you pay for." I submit that
quality work should be compensated. The trustor (the parent in most cases)
should tell the non-trustee children, PRIOR TO THE TIME THE TRUST IS PREPARED,
that so and so will be acting as trustee because of his/her financial background
and that "x" dollars will be charged by the trustee and that it is fair.
That should take most of the edge off the problem. But since most parents
put off a will or trust in any case, it is highly debatable that such
communication will ever occur.
One noticeable and glaring error in the selection of a trustee (or administrator
of a will) is where the trustor picks a spouse or child that, in many cases,
has NO expertise to act in the capacity whatsoever. Being a blood relative
does not signify capabilities in taxes, investments, estate planning, running
a business or the host of other activities that may require expert judgment.
Far too many estates have been ruined not just by the trustee, but due to
the lack of foresight by the trustor. Surviving widows with no investment
background (70% of women between the age of 34 to 54 said they didn't know
how to invest) should NEVER be selected to be the sole trustee of a major
trust. When you add in the period of grieving on top of trying to understand
and cope with financial decisions, they are apt (as well as men with no
experience) to make bad decisions that could have a serious negative impact
on trust assets. It is incumbent on the trustor to spend considerable time
in selecting an appropriate party to act as trustee- or as co-trustee- in
order to avoid these very serious problems.
2. If the trustor has some close friends or relatives with appropriate experience
who could act as trustee, there is the additional advantage that they will
have a far more personal interest in trust activities. The individual(s)
may have first hand ability, knowledge or expertise particularly beneficial
to the trust ventures (running a business for example) and may have the skill
to retain the current list of investments which a corporate trustee would
automatically sell.
But as with all cases in the use of individual trustees, they may move, refuse
to serve, become physically or mentally incapacitated, etc. It is therefore
ABSOLUTELY NECESSARY that additional (known as successor) trustees be added
to the list so that they may take over when any of the above should happen.
It's for these reasons as well that corporate trustees may be indicated as
second in line or that they be designated co-trustees to being with. It may
even be that the corporate trustee would become more actively involved with
the personal aspect of the trust assets when working with an individual trustee
and might even maintain trust assets (where feasible) when the first trustee
is gone.
CO-TRUSTEES
As stated above, we have the use of a corporate as well as an individual trustee acting in concert to manage the assets. While the combination can solve many problems, particularly where there are businesses or other assets which are more manageable by a known associate, remember that the more people involved with any given function, the more friction may arise. A corporate trustee acting for a large institution may be used to dealing at a very "sophisticated" level while the individual may have very "limited skills", In such cases, it becomes all the more apparent that the interview process with the corporate entity is most important. The corporate trustee must have empathy and personal skills beyond that simply necessary to discuss investment philosophy and reports.
But the major issue may be the fact that an individual trustee with "limited
skills" should not have been picked in the first place- even as co-trustee.
An unknowledgeable individual should not make the trusteeship a training
ground for experience.
An additional comment needs to made regarding the use of a surviving spouse AND one of the children as co-trustee.
Experienced practitioners have found that the use of one of the children
as co-trustee has led to bitterness and feuding among the other siblings.
As a result, when the surviving spouse needs help in administering the assets,
an institutional or non-family trustee is preferable.
Now that we have reviewed who the trustees may be, it is also necessary for
the trustor to determine the DUTIES to be granted to the trustee(s). A trustee
must recognize what constitutes a duty to avoid allegations of a breach of
fiduciary responsibility and any resulting liability. These duties are discussed
next.
TRUST DUTIES
1. A trustee's primary duty is to carry out the trustor's wishes per the
terms of the trust agreement. Obviously a trustee who acts contrary to those
desires should be removed from that capacity.
2. A trustee is put into a personal position of responsibility by the trustee-
not someone else. This means that a trustee may NOT delegate these
responsibilities to another person if he/she has the inherent skill and judgment.
However the trustee would be able (perhaps necessary by court order) to hire
outside specialists (attorneys, accountants) and delegate to them specific
duties requiring their special skills and judgment. Responsibilities requiring
essentially no discretion- acquisition and preservation of trust assets and
safekeeping of assets- may be delegated.
3. A trustee has a duty to exercise skill and prudence in carrying out the affairs of the trust. Some jurisdictions use the standard of an ordinary man conducting the affairs of his/her own business.
Others however have established a higher standard based on a trustee acting
as a prudent man with the property of ANOTHER. A trustee not abiding by these
standards would potentially be breaching his fiduciary responsibility to
the trustor. Please note however that a trustee acting under these standards
can still make mistakes and errors of judgment and would not necessarily
be held accountable for this type of resulting difficulty. There is even
another level of accountability where the trustee has special skills or
knowledge. Such trustees may include banks, trust companies and other corporate
trustees and they should required to show a greater level of ability than
ordinary nonprofessional trustees. Some of these trustees try to avoid the
higher limits of fiduciary responsibility by using an "exculpatory" clause
which supposedly limits the level of skill and care to ordinary and prudent.
However some states will not recognize such clauses since they would be against
public policy.
4. A trustee is obligated to be fair and administer the trust in the best
interests of the beneficiaries. This also means that there can be no (except
in rare circumstances) self dealing by the trustee (loans to trustee, buying
trust property at bargain prices, etc.). Any such activity would certainly
make the trustee liable for losses and breach of fiduciary capacity.
5. A trustee holding personal property has a duty to protect and preserve
such property. He should also obtain proper documentation where required
(stock, deeds, mortgages, cash, fire, liability and personal insurance policies,
etc.). Such duty also required the trustee to act promptly and use reasonable
skill to secure said property. Any of this property must be kept separate
from the personal property of the trustee. Any loss due to commingling will
be held accountable by the trustee.
6. Probably one of the most important issues is the administration and investment of the trust assets in a productive manner. The powers to do such work may be limited by the trust agreement (cannot use options, invest in real estate, etc.) or may be designated by the agreement (buying only the highest rated stocks, bonds and mutual funds). Absent anything in the agreement, state law may apply and these laws vary tremendously. Rather than get caught in this bureaucracy of miscellaneous laws however, the trustor should be sure to elaborate on the powers when the trust is established.
One method of selecting investments is under the prudent man rule- "a trustee may purchase any investment that a person of prudence, discretion and intelligence would buy in the management of his affairs, not in regard to speculation, but in regard to permanent disposition of their funds considering the probable income and safety of capital." Most trusts are set up to provide a continuous flow of income, coupled with safety and preservation of principal and any conduct that would impair this criteria might be considered a breach of the trustees fiduciary responsibility. As stated previously, the court will not hold a trustee liable for mistake but would take into context all that the trustee had done.
Such might include the extent of any analysis by the trustee, ratings and
opinions of experts or the use of qualified services (Value Line, Financial
World, Barrons, Lipper), use of diversification, tax status of beneficiaries
and the need to offset inflation.
7. A trustee also has the duty to treat beneficiaries impartially and fairly. It means that all beneficiaries should be treated the same UNLESS the trust agreement has indicated otherwise. Such differences may include extra funds for younger children, those that are mentally or physically impaired, etc.
There is however the difficulty in treating beneficiaries equally if one
group is to receive income and the other (remainderman) is to ultimately
receive the remaining principal. If the trustee should find himself in an
untenable position, he might petition the court for a sale or other disposition
of the property that might keep the individual ownerships equal. That said
however, and from personal experience, particularly if the trust is in another
state, the exercise can be convoluted, involved, time consuming, expensive,
fraught with attorneys from two or more trust departments, the court system
and judges that may not understand the issues as portrayed herein. In other
words, the transfer may not take place. Therefore the last issue for the
subject of trusts is the trust protector.
TRUST PROTECTOR
Articles and personal experience have clearly shown that the selection of a particular trustee may not be beneficial to the beneficiaries over time. The trustor may have believed- and it may have been fact- that the original trustees were professional. But time changes much. An astute trustor may allow a separate individual- separate from the beneficiaries since you cannot have a conflict of interest- to oversee the trust on a regular basis. If this individual determines that the fees are now to excessive, the trustees incompetent, the beneficiaries would be better served by another trustee, etc., he/she has the right, through the original trust agreement, to change these parameters without necessitating a formal court petition.
Additionally, the trust protector can change the terms of the trust if necessary. For example, assume there was to be a distribution of assets to a beneficiary at age 35. However the trustee found out that she, at age 34, was now in a commune. Her funds were apt to be given to the religious cult and lost. The trust protector could reallocate teh funds over her lifetime instead- or until such time as he believed her capable of using the funds objectively.
Or maybe a beneficiary needs extra money now for an operation. The trust
protector can serve a myriad of duties. I would suggest that every trustor
seek further review of this area with proper counsel and definitely implement.
SUMMARY
In short, the selection of corporate and individual trustees is not simple.
It can be, for that matter probably should be, a time consuming process to
pick reputable and skilled people who will handle substantial assets per
your bidding. Many trustors unfortunately pick friends spouses or children
who have no business running their noses, never mind substantial trust assets.
And while some trustors are aware of this problem and thereby select corporate
trustees, a thorough review of the institution's past track record, investment
philosophy and capabilities is mandatory. Much of the problem can be reduced
to a minimum by using some of methods of selection mentioned above and a
good dose of common sense. Regardless of the initial analysis, a trust protector
is almost mandatory.