When selecting a trustee, be sure you understand all of the duties required before you name someone who may not be ready to take on the task.
- It’s not just about honesty and integrity, but also about understanding complex tax, administrative, and regulatory issues.
- Friends and relatives may not have the time, resources, and knowledge to effectively carry out your wishes.
- Corporate trustees offer stability, experience, and the skills required to manage your trust.
As the word is defined, a trustee is a natural or legal person to whom property is legally committed to be administered for the benefit of a beneficiary. If an ad was placed in the newspaper for a trustee position, it might look like this:
- Must be an adult (at least 18 years)
- Cannot be incompetent or incapacitated
- Cannot be a convicted felon
- Cannot be found ill-suited by a court
- No experience required
- Minimal supervision
- No pay (or as little as absolutely necessary)
- High stress
- No appreciation for your efforts
- Could become a full-time position
Based on the above partial job description, how many of the people you might be considering would really be interested? Very few, right?
Is there anything else you should look for in a trustee? Besides honesty and good judgment, they should possess the following additional knowledge and skills:
- The ability to understand complex tax and trust management issues
- The time needed to serve in this capacity
- The knowledge to manage securities, real property, and closely held businesses
- The ability to be impartial. In other words, be the “bad guy” to beneficiaries who believe they are entitled to larger payouts
The selection of a trustee should be a business decision, rather than an emotional one
Take the hypothetical case of fifty-year old Richard. Richard had a net worth of $5 million, most of it tied up in a closely held business, and was concerned about the estate tax his heirs would have to pay upon his death. Being an intelligent businessman, Richard set up a $2 million irrevocable life insurance trust. In an effort to save money and use someone he knew and trusted, Richard named his business partner and best friend, Michael, as the trustee. Michael was honored that his partner had such confidence in him and gladly accepted the responsibility.
Richard paid the $30,000 annual premium for the policy in lieu of direct gifts to his three children, who were also his beneficiaries. Upon Richard’s death, the IRS determined the trustee, Michael, had not sent “Crummey Notices” to the children; therefore, the $2 million death benefit was included in Richard’s estate. Michael protested and claimed he had sent proper notification, but could not locate the records or prove the notices were received. A higher court denied Michael’s appeal.
Now, instead of providing funds to pay estate taxes, the life insurance had caused Richard’s estate to rise in value, thus increasing the tax liability by over $1 million. In a desperate move, Michael was forced to quickly sell the business at a substantial discount. In turn, Richard’s beneficiaries sued Michael for breach of fiduciary responsibility. Michael was compelled to use his personal funds to finance his defense and eventually made a large out-of-court settlement.
What are some of the other potential pit falls of using a well-meaning friend or relative as your trustee?
- Suppose they become sick, die, or just don’t want to do the job any longer?
- If the trustee is also a beneficiary, will the other heirs consider this a conflict?
- Will the trustee be forced to “take sides” in the event of a family battle?
So what should you do to avoid putting someone close to you into this unenviable position? Choosing a corporate trustee might be the answer.
Benefits of a corporate trustee
Corporate trustees generally:
- Have unlimited lives, do not get sick, and seldom quit
- Provide accounting, reporting, and ongoing communication
- Are regulated and monitored by government agencies
- Have strong knowledge of the administrative complexities of trust management
- Can devote their full time and attention to the business of trust services
- Can provide access to professional asset management
When choosing your trustee, keep the complete job description in mind. The bottom line is: a corporate trustee is generally a professional who has more time, experience, and resources to achieve better results than your Uncle Charlie or Aunt Mable.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.