CHOOSING A TRUSTEE
IS LIKE BUYING YOUR FIRST HOUSE,
A DIFFICULT CHOICE.
Can you remember buying your first house? How nervous you were? Not knowing what to ask or who to ask. Often feeling frustrated and confused. Sometimes facing this difficult decision without a great deal of time to think about it. The decision is necessary because of a crisis or other unplanned event. People around you are pushing for a decision, thus you feel pressure from others to not only make a decision, but to make one quickly.
These are the same types of concerns one faces when confronted with the need to appoint a trustee for a trust that is being set up now. Why now? Often because a family may have recently settled or won a personal injury claim and the court demands that the funds be put into a trust to protect a beneficiary, who may be incompetent or very vulnerable. Sometimes a trust is being established because there has been a death in the family and a trust is the best solution for saving assets to avoid a large income tax liability or for protecting the assets of a beneficiary, who cannot be protected due to age or incompetence. Unfortunately many who need to appoint a trustee are not only faced with this dilemma, but they are also facing other pressures at the same time, making the choices even more difficult. These are enormous pressures similar to a family whose breadwinner is transferred to a new city, a new state or even a different country and must find a new home quickly. Similarly, but even more emotionally, a trust may be the result of an extremely serious and horrific accident that has turned the entire family upside down. Because of these circumstances, the family is not only faced with the decision to appoint a trustee, but also faced with many decisions, many of which are permanent, and all of which need to be made at the same time.
This article will help guide a family through the maze of learning about trusts. It will also help by providing a number of characteristics that a family really needs to look for when selecting a Trustee. It will give you the tools you need to move forward to make the decision you know you need to make with confidence and courage. Like the decision to buy your first house, the family was faced not only with moving but numerous other concerns as well. Although this article is addressed to those who need to form a trust now for whatever reason, nevertheless it may also be helpful to those who are setting up a trust to protect their family’s future. It is a matter of what choice they will make and how that choice can best be made.
WHAT IS A TRUST? WHAT IS A TRUSTEE?
In order to fully understand what you should look for in selecting a Trustee, you really need to know what is a trust and how it functions as well as what is the role of the Trustee. Therefore, I will first define these terms so that you know the role the Trustee will perform for you and your family and thereby know more about what characteristics the trustee must have in order to best administer your trust for you.
Establishing a trust is like setting up a small company whose sole responsibility it is to protect the assets for a beneficiary and distribute funds either to the beneficiary or to others for the benefit of the beneficiary. A trust will have its own tax identification number and file its own income tax return. A Trustor is the person who sets up the trust for the benefit of another. In some cases, the Trustor is a member of the family and in other cases, it may be the court itself that is establishing the trust.
Trust Agreement
The document setting up a Trust is called a Trust Agreement. It is created by you and your attorney to provide instructions to the Trustee of what you want accomplished, how you want the assets are to be invested or protected, and how and when money will be distributed. This document is tailor made for your family and the specific needs of the beneficiary or beneficiaries named in the document. This document can be very specific. For example, a family would not leave their children with a babysitter without instructions, which TV programs the children can watch and emergency phone numbers. The Trust Agreement is similar in that it is a document with instructions on how to care for the person or persons named as beneficiaries in the Trust Agreement. The language in the Trust Agreement may be as specific and detailed as you wish or as broad as you wish depending on the specific reason for the trust and the individual beneficiary for whom it is responsible.
Once the Trust Agreement has been agreed to by all parties, specific assets are then transferred to the trust and a separate bank account and investment accounts are set up in the name of the trust. In some cases, when this is a personal injury settlement actual cash will be deposited into the trust, either in a lump sum or an amount at various increments over time. However in some trusts, the asset may be an apartment building or a family home, it will be whatever property the Trustor transfers to the trust.
Lastly, the document itself will identify who is to be the appointed the initial Trustee. It is important that the Trust Agreement describe how and under what circumstances a Trustee can be changed or a successor Trustee named. In some situations, only a court can make this change as the trust itself is monitored by the court. However in other circumstances, it is beneficial to have specific language describing under what circumstances a Trustee may be changed and by whom. This is because the beneficiaries and/or the Trustor may become dissatisfied with the services provided by the initial Trustee.
A Trustee
A Trustee is the person or institution that is appointed to be responsible for the protection of the assets that are owned by the trust, but also to make provisions for the beneficiary/ciaries of the trust pursuant to the Trust Agreement.
“It is the duty of a trustee to administer a trust solely in the interest of the beneficiaries without permitting the intrusion of interests of the trustee or third parties that may in any way conflict with the interests of the trust; to keep and render accurate accounts with respect to the administration of the trust; to acquaint the beneficiaries with all material facts in connection with the trust; and, in administering the trust, to exercise the care a prudent man familiar with such matters would exercise as trustee of the property of others, adhering to the rule that the trustee is primarily a conserver.”
In some circumstances a family member may be appointed as a co-trustee with a professional trustee. In this way, the family member will have input as to their concerns regarding the beneficiary and their interests are well represented. At the same time, the family benefits by having a professional trustee working closely with them on all decisions.
Another important role for the Trustee is communicating effectively with the beneficiary. It is the Trustee who will keep in contact with a beneficiary to determine their needs and to weigh those needs with the trust document to determine how and when the trust can fulfill those needs. For example, in one trust a Trustee was requested by the family to pay for a summer camp for a young child. This was a very wealthy family and the child’s parents were deceased. There were two choices to choose from, one camp was $5,000 and the other camp was $10,000, but the child could bring her own horse to this more expensive camp. The Trustee chose the $10,000 camp, because the Trustee’s role pursuant to their particular trust agreement was to make decisions that the parents would have made for their child had they been alive and there to do so. Thus, the Trustee must make decisions based on what the family would have done had they been there, keeping in mind the total assets available in the trust. All decisions made by the Trustee must be done in accordance with the Trust Agreement. Therefore, the Trust Agreement itself is extremely critical since it will dictate just how much discretion the Trustee will have in making decisions and what is the purpose of the trust. If broad discretion is given to the Trustee, the Trustee must have a full under- standing of the purpose of the trust and the desires of the family and/or the Trustor. This requires a Trustee to be sensitive to those desires and willing to take the time to listen to the family and give them all the attention they need in order to fully communicate the needs of their beneficiary.
Another role played by the Trustee is that of record keeping and accounting. The Trustee must keep accurate records and maintain accounting systems to reflect all income, expenses and distributions of the trust. It will also have the responsibility of preparing and filing the annual income tax returns for the trust. Thus, the Trustee has an important role in keeping accurate accounting records. Further, if the trust is a court monitored, the Trustee will prepare the annual detailed report for the court’s review and approval. This will include not only a detailed accounting of the year’s expenses and distributions, but also details with respect to how these expenditures met the needs of the beneficiary. It will also describe in detail what income and expenses are anticipated for the upcoming year, and why such expenses and distributions should be made as well. After the court approves the report, it will also approve a budget for the future year and the Trustee will be ordered to follow the court’s ruling along with the Trust Agreement in making any decision to meet the needs of the beneficiary for the upcoming year.
In conclusion the drafting of the Trust Agreement and the selection of a Trustee are critical in having a trust accomplish the goals of each particular family. Choices must only be made after giving the matter careful consideration and thought.
QUALITIES DESIRABLE IN A TRUSTEE
Although qualities often considered first and foremost are whether the trustee is competent and has the experience to do the job, it is my belief that the most treasured quality is that of availability and flexibility to meet changing circumstances. Over the years complaints are often raised because the Trustee does not listen to the beneficiaries nor does the Trustee communicate with them in response to their questions.
In one case, a trustee was a large banking institution and the beneficiaries called numerous times and sent letters and very seldom received any response. This particular bank was found to have more than 150 trusts assigned to a given trust officer. Was this trust officer competent? Likely yes. Did this trust officer have experience? Likely yes. However, Was this trust officer available to respond to the needs of the family? No.
The following is a list of some of the attributes you would want in any Trustee you appoint:
* Availability
* Sensitivity to beneficiaries and their circumstances
* Flexibility to meet changing circumstances
* Fees
* Lack of Conflict of interest
* Competence, integrity and decision making ability
* Experience
* Willingness to serve throughout the term of the trust or resign when requested.
Availability, Sensitivity, Flexibility
Availability is so important as a beneficiary’s needs may be critical and timing could be of the essence. Working with an institution that is too large can cause real concerns for a family if there are immediate needs. Thus, it is important when interviewing potential Trustees to find out the answers to a number of questions. For example: How and how frequently do account officers communicate with customers by visit, letter and phone? What is the number of accounts handled by each officer and how do any administrative assistants function to help him? How many contact officers will each account have and how do these officers communicate with one another? What is the backup available if the account officer is absent from the office? How fast should a reply be expected to letters? How many persons will have review each decision made for a disbursement? Unfortunately, the trend today is to have smaller trusts handled centrally, sending their accounts from all over the country to one location.
Is this Trustee truly available and can they truly be sensitive to the needs of a given beneficiary? For example, an older beneficiary in Washington is faced with calling a 1-800 number on the East coast to request a gift to her grandchild, or in another case a family with an ill child has an emergency needs funds immediately. Both are faced with the three hour time change having to call the East coast. Both may get a person on the line who may not even be the decision maker, but merely a receptionist who will have to pass on information to someone else. Both are left hanging with no actual contact with a decision maker possibly for several hours or even days. Thus, availability is a major factor in making the selection of a trustee.
If a Trustee is available, but not willing to listen or provide time for the beneficiary and/or their family then it is equally problematic. A trustee must be sensitive to the needs and willing to work with the family to accomplish their goals. Sometimes this takes flexibility to work around changes that may occur within the family. Again large institutions are not always as flexible as needed since any changes may require numerous other departmental supervisors or others to agree on any change, which may take a long time or even result in the Trustee not being able to meet the needed change at all. The relationship between the Trustee and the resultant beneficiaries is very important in order for the goals of the trust to be met. Thus, availability, sensitivity and flexibility are truly major factors to consider in selecting a Trustee.
Fees
In looking at fees, most institutions charge a percentage of the assets in the trust. For example, if the total value of the trust is $1,000,000 the fees charged are likely 1% or more depending on the institution. This fee would likely cover both the administration of the trust and the management of its assets. Some companies will provide only administration of the trust and will work in conjunction with a money managers or financial planners of your choice. In some ways, this can provide more flexibility. It may also provide even more protection as two different parties are working in your best interest. This may be particularly beneficial when a family is already working with a family financial planner with whom they are comfortable. In this way, the trustee is the only new person. When the trustee is providing administration only, it often will charge either a percentage or hourly rates depending on the activity they are performing. In this way, the fees can be much less than a straight percentage charged by most large institutions. In many cases, the hourly charged fees can be substantially less than a percentage.
Conflict of Interest
In any court monitored trust, the court will verify there is no conflict of interest and that the Trustee is in no way personally involved in any way with any beneficiary and further that there is no likely possibility that they would in any way be come into any type of relationship. However, in looking at Trustees you must keep in mind this factor as it may be a concern if a relative worked for a particular bank, or trust company; or if a beneficiary may work for a given company. This is rarely a concern, but it could be one if a person does not keep this in mind when making a selection.
Competence, Experience and Integrity
In this case, request information with respect to references and a resume reflecting the credentials of the person or persons who will be in charge of your account. In many cases the credentials of the persons in the trust department or working in a trust company are higher in the investment side than they are in the administration side. Most of the investment advisors have a BA as well as additional financial certifications. In some cases those who work in the trust administration side will have degrees in business or in some other related field. Having higher degrees, such as a J.D. or PhD may be helpful, but not always necessary. Obviously, you will want to follow-up with references to determine how one measures up in both of these categories. Again these are rarely a problem if you are interviewing a licensed company; however do not let your guard down by making assumptions.
Willingness to Serve Throughout the term of the Trust
Here you will want to know the succession plan for the company. How long have they been in business and how do they foresee their future, especially when you are looking at a long-term trust. For example, recently we were appointed by the court in a trust for a small baby, which will be in effect for her lifetime. Thus, it is important to the family that this company will be around for many years to come.
Another concern arises when looking at banks and other large trust companies as they move employees from one location to another, sometimes quite often, thus the trust officer on your account could change several times even within a given year. This may occur as well when the institution you began with is purchased by yet another institution, causing you to work with a new trust officer, one you did not hire. In one situation I am familiar with, the trust had two trust different officers in the same year. Later that same year, the bank was bought out and again the family had yet another trust officer. Thus, the bank may be willing to serve, but have numerous changes that effect its relationship with the beneficiaries and they may want a change.
Willingness to Resign
There may be an occasion where the beneficiaries are so far removed that the trust could be administered better elsewhere, or when the original trustee bank has changed so much in its personnel and policies that switching account officers is not going to produce satisfaction for the beneficiaries. Even in these circumstances, an institution may not be willing to resign even if requested to do so by all of the beneficiaries of the trust.
In some circumstances the Trust Agreement will limit when and how a Trustee may resign and how a Successor Trustee is to be selected. This only demonstrates how critical it is that the Trust Agreement provide regarding a change in Trustees. When the trust is monitored by the court, the court would have to approve any resignation as well as any newly appointed Trustee as it is the court that approves any change.
If the trust is not court monitored, and beneficiaries want a change and the Trustee is not willing to resign; then the beneficiaries may be forced to go to court to remove the Trustee. A court may require the beneficiaries to prove that the Trustee failed to act properly or failed to provide the care for the beneficiary required under the Trust Agreement. This can be very costly and time consuming. Recently beneficiaries of a trust paid over $50,000 to have a large bank removed so they choose a new Trustee. This is one of the reasons why some fee agreements provide that the contract may be terminated at any time with 30 days notice by either party.
CONCLUSION
Choosing a Trustee is not an easy task. It requires careful consideration and thinking in terms of what may be the case years from now. This is not always easy. The suggestions mentioned in this article and the ideas provided should help you in selecting a Trustee that will accomplish your purposes as set forth in your Trust Agreement.
[1] When it is a special needs trust set up by the court for an individual who is obtaining an award for personal injury, the court is essentially the Trustor and will monitor the trust and all of its expenditures and distributions including the trustee fees and legal fees.
[2] Adopted by the Executive Committee of the Trust Division of the American Bankers Association on April 10, 1933, and approved by the Executive Council of the American Bankers Association on April 11, 1933.