Choosing The Right Trustee
How to Choose the Right Trustee for Your Family Trust
Families are complicated. Family financial planning is even more so. That planning can become particularly intricate and emotionally fraught for high-net-worth families that have a lot at stake.
One way a family can handle the issues that arise when transferring significant wealth is a trust. A neutral, third-party corporate trustee can provide balance between family interests and asset protection.
But it’s not quite that easy. A trust, and the people who administer it, need to be chosen with care.
Why you need a trust in the first place
The reason to establish a trust is simple: It can protect a family’s assets from estate taxes, divorce and creditors.
While federal estate taxes are less of an issue for most families given the lifetime exclusion of $11.4 million per person, many states levy inheritance taxes with a significantly lower threshold. A trust lets you transfer assets out of your estate during your lifetime, lowering the estate’s value.
Since the trust owns the assets it contains, they don’t represent marital property in the event of a divorce. Nor can creditors of a trust’s beneficiary reach into the trust for repayment, said Thomas Frank, Executive Vice President and Northern California Regional Manager for Whittier Trust.
In addition, placing shares of a family business into a trust means that the trustee, not the beneficiaries, holds the voting rights for them. If current beneficiaries were to hold them, they might vote in a way that is clouded by their own self-interest. The trustee, on the other hand, must vote the shares with all beneficiaries in mind — both current and future beneficiaries of the trust.
Investing in expertise — and integrity
A trustee’s role is to comprehensively safeguard and manage the trust property, which can involve everything from making sure that trust real estate is properly insured, to managing the trust’s stock portfolio, to issuing financial disbursements to beneficiaries in line with the trust’s terms.
It is impossible to overstate how important it is that the trustee be the right person; so in choosing that person, here are some guidelines to keep in mind.
• The perfect trustee is probably not your spouse.
Your spouse might seem like the best person to manage your trust once you’ve passed. After all, there is probably no one on the planet whom you trust more.
Yet such appointments often lead to complications, said Frank, and especially in blended families — when, for example, a stepparent is involved.
“We see a fair amount of litigation where stepkids sue the stepparents for poor management of the trust,” said Frank.
“We encountered a situation where a stepmom was named as trustee and invested all of the trust assets in bonds, which provided her with a lot of current income but didn’t provide any growth for the remainder beneficiaries,” said Frank. “She didn’t do it out of malice. She just didn’t know. But the remainder beneficiary sued her.”
Eventually Whittier Trust became the successor trustee, and matters ironed themselves out. But the family was forced through a period of tension and incurred over $100,000 in legal fees.
A spouse as trustee can create other complications as well. He or she could remarry, and immediately want to make financial provision for the new spouse, and even that new spouse’s relations. And a spouse, often being close in age to the grantor of the trust, might soon be facing the same health issues, including diminished mental capacity.
Then there is the fact that a spouse can be subject to the undue influence of certain family members.
“Maybe a couple of the kids live really close and they see the spouse a lot, while the other one lives across the country,” said Frank. “The child who’s not close geographically might think that their siblings are influencing mom or dad.”
That is not an issue when a third party serves as trustee.
• It might not be your child, either.
Naming your adult child as your trustee can create similar challenges.
First, not every child is capable of, or even particularly interested in, managing trust assets, Frank said.
Second, child-as-trustee situations can be time bombs from a family-dynamics standpoint. That can be the case even if family members are in business together, and used to dealing with each other in a financial context.
“Running the business for the benefit of your siblings or cousins is hard enough, but then also having the additional level of legal liability and responsibility involved in being their trustee just places that much more responsibility on someone,” said Frank.
“And even if the kids all get along, their spouses may not, particularly when it comes to a lot of money or a family business that’s generating cash,” Frank added.
If a child is running a family business, Frank said, a better solution is to leave him or her to it — and name an independent trustee to run the trust itself.
• Don’t underestimate what a professional can do.
A trustee, Frank said, will essentially “be stepping into the shoes of the grantor.” The trustee therefore has to be someone “who knows the grantor or who has a clear understanding of what the grantor would want.”
If the trust holds voting shares of a family business, the trustee needs to have some level of expertise in that business. He or she will be dealing with management, after all, and possibly sitting on the business’s board, Frank said.
“If a problem comes up, the trustee needs to be able to jump in,” he added. “The trust owns it.”
Some families balk at the idea of hiring a corporate trustee because of the potential lack of control and the expense. Frank says that sort of anxiety can be misplaced.
“A good estate planning lawyer will make sure that the family retains some control over the trustee, but still is able to have professional management and push off some of that liability,” said Frank.
As for the expense of retaining a corporate trustee, everything is relative. Frank points out that families easily spend hundreds of thousands of dollars in legal fees when members start suing each other. A third-party trustee can ideally manage affairs in such a way to help prevent lawsuits in the first place. Avoiding such a trustee can thus be “penny-wise and pound-foolish,” he said.
Selecting a trustee involves numerous factors, many of them unique to particular families. The need for professional and neutral trust management is universal, however. A trustee who develops strong relationships with grantor and beneficiaries; who resists and even helps resolve intra-family political issues; and who mentors younger generations in their stewardship responsibilities, even while protecting and growing the family wealth, is the right sort of trustee to have.
Often, that trustee will be a third-party corporate one.
Written in partnership with Forbes BrandVoice.
CHOOSING THE RIGHT TRUSTEE FOR YOUR FAMILY TRUST
- The perfect trustee is probably not your spouse.
- It might not be your child either.
- Don’t underestimate what a professional can do.