Trusting Trustees

Selecting a
trustee is a tough decision but the concerns you may have over potential
candidates can often be mitigated by naming additional fiduciaries and
including provisions in the trust document to address concerns you have. These
steps can make the selection process less difficult or worrisome.

The Decision

Struggling over who to put
in charge of Junior’s treasure trove?  The most important decisions you’ll have to make in
completing an estate plan is choosing a trustee to manage the trusts you
establish. Whether the trust is for yourself, your spouse, or other heirs, the
control a trustee can wield makes the decision daunting. You need to identify
someone with the integrity to carryout the job appropriately, the sensitivity
to the beneficiaries and the sophistication to deal with tax, legal and other
complex matters.  What non-tax factors
should you consider in choosing a trustee? What steps can you take to mitigate
the concerns you have that a trustee may not have all the requisite attributes,
or even if she does that she may not perform as expected? How can you plan your
trust to mitigate the worries over trustee selection? Careful planning and
drafting can often address the concerns you have with this decision.

Role of a Trustee

The trustee you designate
will be charged with managing the trust and implementing your wishes as expressed
in the trust agreement. Trustee responsibilities vary depending on the nature
of the particular trust. However, there are duties which are common to most
trusts: investing trust assets, making distributions to beneficiaries,
coordinating investment decisions and distributions to current and future
beneficiaries, recordkeeping, filing trust income tax returns, and communicating
with beneficiaries. A clear trend in trust planning is to opt for longer term
trusts; trusts that last a lifetime, or even perpetual trusts. The difficulty
of the tasks and time periods faced by trustees are compounded by the
tremendous diversity, even hostility, amongst heirs. Identifying a perfect
trustee is almost impossible. If you view the decision in a broader sense of
the flexibility and controls a trust can provide over trustee selection and
trustee actions, the decision becomes more complex, but often much easier to
make.

Switch Trustees

Sometimes different people
are appropriate for different phases of your trust. Name an initial trustee and
when a child of yours matures to a specified age he or she can join the
existing trustee as a co-trustee. On an insurance trust you might name your long time accountant as trustee
while you are alive. On your death when the insurance proceeds are collected the
role of trustee changes from more of an administrative role to one of investing
and distributing funds to your children. The trust agreement could state that a
new trustee takes over at that time.

Name a Co-Trustee

Name two trustees to serve
together as co-trustees. Each trustee provides a check and balance on the
other. Each trustee can bring different skill sets to the trust management
function.  One might be
compassionate and empathetic towards the beneficiaries; the other may bring
investment and other technical expertise.

Name an Institution

There is a clear trend
toward more frequent use of banks and trust companies as trustees. They can
provide the objectivity and professionalism that Uncle Joe may just lack. A
common approach is to name a family member as co-trustee with an institution.
The institution can provide investment management and administrative services
so that there is less imposition on the family member who likely has her own
family, work and other responsibilities. This approach permits the family
member focus on bringing the personal touch you want, while the institutional
co-trustee bears much of the work and responsibility. If the trust you’re
forming is long term (lifetime or perpetual) institutions provide the certainty
of having a trustee for the duration.

Delineate Distribution
Objectives More Clearly

Most trust documents use
rather generic language for what should be distributed. That language is often
based on tax and asset protection considerations, often tempered by your wishes
for more control or certainty. Distribution provisions don’t have to be limited
to legalese. You can provide some level of detail as to distributions you want
to more clearly guide the trustees as to the lifestyle you want for the
beneficiary (e.g., summer camps, and overseas travel), or that you don’t want
(e.g., no purchase of airplanes, or boats). You can specifically authorize a
trustee to use trust funds to buy a house for a beneficiary. Reasonable detail
can mollify worries over the trustee not distributing funds in the manner you
wish.

Define Investment
Parameters more Explicitly

Too many trusts simply
default to standard language mandating that a diversified investment portfolio
be held as mandated under the Prudent Investor Act. Many trusts simply provide that state law
governing investments can be ignored. That might be acceptable, or disastrous,
depending on the circumstances. If you tailor the investment provisions more
carefully, the decisions as to who manages the trust investments can be less
difficult to make. For example, if you have a family business, you could
authorize the trustee to hold that business without regard to diversification
requirements. You could even provide parameters as to when the business can be
sold (e.g., no heir is working in the business for a period of two years). You
can create sub-trusts under the trust with one trust holding family business
interests and the other trust being invested in accordance with modern
portfolio theory. Reasonably limiting and guiding what investments can and
cannot be made can provide greater assurance that whoever is serving as trustee
will carryout your investment wishes.

Name Additional
Fiduciaries

Dividing up trust
functions with additional fiduciaries responsible for specific roles that are
thus removed from the purview of the trustee, can often solve the dilemma of
who to name as trustee. You can name a trustee but carve out the investment
role for a person or institution who has great investment expertise but is not
appropriate to serve as a trustee.  You can remove the distribution decision from the trustee and
name a separate distribution committee. You can name a trust protector and
grant specified oversight powers to him (e.g., change the institutional
trustee). A combination of trustee, investment adviser, distribution committee and trust protector, each with specified powers and responsibilities,
can often provide a structure to address the reality that you may not be
comfortable vesting all power in a single trustee, or that you don’t have
anyone who can alone fulfill all the roles required.

Empower the Beneficiaries
to Replace the Trustee

Give the beneficiaries a
right to replace the trustee. In many cases this may be limited to replacing an
institutional trustee with another institution. The threat of replacement can
often do wonders to assure a more attentive trustee. This power, however,
should be tempered to avoid empowering beneficiaries to trustee shop for the
trustee who will simply do their bidding however inappropriate.

Name an Independent
Guardian

When setting up a trust
for a minor in your will, consider naming one person as trustee and another as
guardian to provide checks and balances. Perhaps the guardian can serve as
co-trustee with an independent trustee so that the guardian doesn’t avoid
scrutiny.

Write a Letter of
Instruction

Not everything belongs in a legal
document. Details as to the lifestyle you want an heir to live might best
belong in a personal, non-legally binding, side letter to the trustees. These
in depth personal instructions can be invaluable to a trustee trying to
speculate as to the decisions you would like made under different situations.
Providing personal guidance to a candidate who has the integrity, compassion
and ability to serve as a trustee, but lacks the personal knowledge of your
heirs, may solve your concerns.