Selection of Trustees
As a professional client advisor for more than 30 years, I have worked with quite a few families struggling to make good decisions about how to arrange their affairs after their deaths. And while no one likes to sit around and think about death, business leaders talk regularly about planning for “succession.” The reality is that decisions made in this process are consequential and far-reaching for the family that is left behind. In reality, the primary focus of this process should not be about death, but about planning the best possible future for children and as-yet unborn family members.
In that context, decisions about trustees are some of the most significant and often the ones given the least amount of thought. If your family has enough wealth that your estate plan makes use of multi-generational trusts, the trustee you name has an important, long-lasting job. So how should you make the selection?
IMPORTANT THINGS TO CONSIDER
First of all, the trustee needs to know the people who benefit from the assets held in trust – that is, needs to know them all, and well. If you accept the premise that the role of a trustee is fundamentally a stewardship role, then it’s easy to see that the trustee can’t make good decisions about the best interests of the beneficiaries without knowing them. Who are they? What do they do? What about their family and their lifestyle? What about their level of financial skills and the quality of their family life? Are they able to make decisions that steer themselves and their families towards self-sufficiency, or are they just focused on maximizing consumption and personal lifestyles? Questions like these are very hard to answer, but that fact should not mean that we don’t consider them thoughtfully and thoroughly, because the job of a trustee often comes with a very long tenure. If a trustee candidate is not willing to commit to know the beneficiaries, move on.
Our insights: When our firm interviews candidates for trust officer positions, one of the first questions I ask the candidate is what percentage of his trust beneficiaries he knows personally in his current position. The answer often ranges between 20% and 30% – a shockingly low number, in my view. That number should be close to 100%.
COMMITMENT TO STEWARDSHIP
If we think more about the trustee as a steward, then simply knowing the beneficiaries by itself is not enough. A trustee must also commit to the idea of helping them. If trusts for your children end up owning interests in family real estate or family business interests, is it enough for the trustee to make unilateral decisions about the use or disposition of these assets for the family and just dole out cash to beneficiaries? Or, if the trust owns just financial assets, is it ok if the trustee is just a good investor and make distributions to beneficiaries using a formula-based percentage of the trust assets? In my mind, that sets the bar very low. The notion of stewardship suggests much more to me. A better approach would be for the trustee to engage with beneficiaries to help them understand what it is that they own, seek input from them about their wishes and plans and help them understand the intent of the trust creators, all in service of a more collaborative decision-making process.
Our insights: For some reason, it seems to be fairly common that a trust beneficiary wants to open or invest in a restaurant. Whenever that question comes up, I ask first for a business plan and for detailed cash flow projections. If that information is not available, I usually skip the rest of the questions – like asking for copies of the operating documents and the buy-sell agreements. The point? A trustee should encourage a trust beneficiary who wants to be in business, but desire by itself is not enough. Until the beneficiary acquires the necessary skills and experience, I’m not sure it’s helpful to distribute funds for such an investment. Eating in a restaurant doesn’t qualify me to own or operate one.
SOMETIMES SAYING NO IS RIGHT
Stewardship and collaboration do not mean always saying yes. There are almost certainly going to be times when a trustee has to say “no” to some type of beneficiary request. It might be because a beneficiary asks for excessive trust distributions, but it might also be because a beneficiary wants to hold a legacy family asset and the trustee disagrees. A successful trustee is not one who will always say yes, but is one who can have a productive discussion with the beneficiary explaining the reasons for the trustee’s decision. An important question to ask yourself then, when selecting a trustee, is whether you have confidence that the trustee can say no at the right time and retain the confidence of the beneficiary.
This highlights another important point. I always recommend including language in a trust instrument that permits beneficiaries to remove and replace trustees. That right can be tempered to avoid “trustee-shopping” – shopping for a friendly trustee that will do whatever the beneficiary asks. The trust can, for example, allow removal and replacement once every three to five years, or can require that other family members or professional advisors concur with the decision to remove and replace the trustee. The right itself, though, is an important way to provide checks and balances for trustees who do not perform well. If that language is not in your current trust instruments – even trusts that have been set up and funded – it is worth adding, and the process for doing so is normally not onerous.
Our insights: Since 2008, there seems to have been a sea change in families’ attitudes about their trusts and trustees. As banks combine, consolidate, merge and streamline by moving “back office” operations to remote locations, their ability to respond to trust beneficiaries has in some cases become severely limited. Often, a local trust officer can’t act without first consulting a trust committee in Chicago or a legal department in New York. How can each of these groups, designed for cost savings rather than family interaction and understanding, bring anything really meaningful to the conversation? When faced with issues like this on a regular basis, many more families are looking at the trustee removal/replacement language in their trust agreements – and for good reason.
DESIGNATING A CO-TRUSTEE CAN ADD TRUST EXPERTISE TO A FAMILY’S BUSINESS EXPERTISE
In some situations, designating co-trustees can be a very sensible alternative. Typically, this involves choosing an individual co-trustee and a corporate co-trustee to act together. Many corporate trustees are reluctant to serve in this manner, but choosing a corporate trustee can provide a more robust process for meeting the myriad of legal and procedural requirements imposed on trustees. Putting a corporate trustee together with an individual who really knows the family can be a very effective option.
Having a child serve alongside an experienced co-trustee for a period of time before taking over as sole trustee can provide valuable experience for a role that is not necessarily intuitive.
Our insights: The most common situation where a co-trustee may be appropriate is where the trust owns an interest in an operating business. In that situation, the co-trustee (often a corporate trustee) can help ensure that proper trust protocols are observed, while the family member can infuse the family’s experience, knowledge and point-of-view about the business. Working together, the combined skill and knowledge of co-trustees can be a productive and positive way to meet the family’s needs.
SO WHAT ABOUT A CORPORATE TRUSTEE?
In conversations I have with clients, their reluctance to consider corporate trustee stems from the fact that corporate trustees are perceived as expensive, impersonal and difficult to work with – and sometimes they are. Clients may also fear that corporate trustees will not really understand the importance of a family asset, or that they will automatically sell something that is very important to the family to keep. If you find a corporate trustee that understands and embraces the role, however, there are very effective ways to deal with these issues.
First, it is important to understand that being a trustee (either a corporate or personal trustee) comes with pretty significant expectations and obligations. Trustees are held to very high standards under the law, and not meeting those standards can result in significant liability. For a family member or friend who serves thinking he or she is doing the family a favor, think about how awful it would be to get hauled to court for not meeting the standards of a role you didn’t fully understand? Ouch. And if you think of having siblings serve as trustees for one another, even for a moment, proceed with caution.
This is often a recipe for family conflict. Sometimes it is ill advised even to have siblings receive distributions from the same trust.
The technical and procedural hurdles for serving as trustee are pretty high. There are very complicated rules about how trusts must account for principal and income, very complicated tax rules that dictate how income from trusts and distributions from trusts are taxed and a whole host of other rules and requirements that make the job pretty difficult. Asking a friend or family member to serve as trustee and having the family CPA do all the tax work may not be the best answer.
ASKING INFORMED QUESTIONS YIELDS INFORMED RESULTS
This brings us back to a central question: should I use a corporate trustee? My conclusion is that a corporate trustee, or a corporate co-trustee, is definitely worth considering. It’s not the right answer for every situation, but it often makes sense. To get the result you’re hoping for, however, choosing the right corporate trustee is critical.
Ask a potential corporate trustee about some of the more complex situations you might encounter. How does the trustee deal with ownership of concentrated investments? If the family wants the flexibility to retain them, a good trustee may encourage language that permits or requires the trustee do so, or may identify a process that allows the beneficiaries to document such a request of the trustee. And if a beneficiary becomes addicted to drugs or alcohol, how will the trustee address it? If family circumstances change over time, and if the language in the trust agreement requires update or modification, how will the trustee help? And how does the trustee manage special legacy assets, like family business interests or family real estate?
Our insights: Some of the saddest situations I’ve observed as a trustee involve substance abuse or addiction. I’ve seen disinterested corporate trustees ignore the signs of substance abuse, respond to repeated requests for increases in distributions and distribute funds to the point that the trust is substantially depleted. A thoughtful trustee should engage the counsel of qualified substance abuse professionals and work with them to help the beneficiary get well. Ignoring it may be easier, but it certainly is not the best thing for the beneficiary or the family.
Who will the beneficiary interact with? Is that interaction likely to be by phone, in person or both? How frequent will it be and how often is it likely that the contact person changes? How are distribution decisions made by the trustee? Is a trust committee involved, and where are they? How likely are they to know the family, and how quickly can they make decisions?
THE BEST PRESCRIPTION? BE THOUGHTFUL.
Ultimately, a decision about the trustee of a family trust is a very personal one, and there is no one prescription that fits every family. The decision is an important one, and going through it completely and methodically can help you and your family make the best choice for the family’s long-term future.