One of the most important decisions a client will be faced with during the estate planning process is whom to nominate to serve as trustee of his or her trust. The trustee will control the manner in which trust assets are used to support the beneficiaries of the trust as well as the way in which trust assets are managed to ensure a return sufficient to support the beneficiaries. Therefore, a trustee must be able to navigate both the interpersonal and financial issues that arise during the course of trust administration, and it is important that a client seriously considers a potential trustee’s ability to address both sets of issues before making a decision.
Qualifications of a Trustee
In order to perform his or her duties to a fiduciary standard, a trustee needs to possess a number of qualifications and skills, such as the following:
- The ability to exercise sound judgement;
- An understanding of the duties and responsibilities of a trustee;
- The knowledge and judgment to administer the trust and manage the trust property;
- The ability to analyze a situation objectively and act with integrity;
- The patience and understanding to work with and meet the needs of beneficiaries;
- The time and expertise to manage the trust; and
- The candor to disclose all conflicts of interest.
Why Not Appoint a Family Member as Trustee?
When faced with the daunting question of whom to name as trustee, the first instinct of many clients is to select a family member or close relative.
The selection of a certain family member as trustee is natural for many clients, because this is a person with whom the client is familiar and has a trusting relationship. It is likely that the client and the family member share common values and a sense of the family’s legacy and therefore that the trustee will be able to understand the client’s goals and objectives in establishing the Trust. Further, a family member will have an insider’s knowledge of the family’s history and the dynamics that exist among family members, which can help navigate emotional issues that arise during the course of trust administration. Finally, a family member may forego imposing a fee while serving as trustee, whereas a professional trustee will charge a fee for their services.
Why Not to Appoint a Family Member as Trustee
“The path of least resistance leads to crooked rivers and crooked men,” as Thoreau is quoted, and while there are many obvious reasons a client may be inclined to name a family member to serve as trustee, there are good reasons a client should resist this inclination.
First, a family member may lack the experience and skills to successfully administer the trust and carry out a client’s objectives in creating a trust. Further, even if a family member possesses the skill set necessary to properly administer the trust, he or she may lack the time, focus or motivation to effectively do so.
While a family member may possess both the financial acumen and the time to devote to trust administration, he or she must also possess the disposition to properly administer the trust.
Because the trustee must manage the trust’s assets so they are sufficient to meet the needs of both current and future beneficiaries, the person named as trustee must be able to say “no” to frivolous requests from beneficiaries, ignore other family members who may ask for loans from the trust, and turn down investment opportunities from friends and acquaintances. Additionally, a trustee may have present or future conflicts of interest which may require him or her to recuse himself or herself from certain decisions in his or her capacity as trustee or to forego certain personal opportunities. Therefore, a trustee must be prepared to accept the resentment of beneficiaries and other interlopers and potentially forego personal opportunities in order to fulfill his or her fiduciary duty.
Even if a client has identified a family member who checks all the boxes and is a perfect fit for the role of trustee, the client should consider the effect that naming such a family member may have within the family. Naming one family member over another can create acrimony or aggravate existing fault lines within a family, and hurt feelings may develop among those who are not chosen to serve as trustee. Beyond hurt feelings, however, the management or mismanagement of trust assets can lead to serious family strife and litigation that may be driven more by emotion than reason.
Though the task is daunting, some clients will have family members capable and willing to fulfill the duties of a trustee. If a family member is selected, it is often important to implement checks and balances in the trust documents to prevent unintended consequences.
If You Appoint a Family Member as Trustee
If a client’s initial instinct of choosing a family member to serve as trustee is borne out after analysis as described above, the client should also consider building a few protections into the trust documents to protect all parties who are interested in the trust.
First, a client should retain the power to remove and replace the trustee during his or her life, and the trust instrument should provide for the removal and replacement of the trustee after the client’s death. Both such provisions can easily be included in a trust, and clients commonly provide responsible descendants with the power to remove trustees and choose a replacement. One option in this respect is to appoint a trust protector, an individual named in the trust instrument who is empowered to review the actions of trustees and take action to remove a trustee who is not fulfilling his or her duties to the trust or is clashing with beneficiaries.
Another option is to appoint two or more trustees to serve simultaneously. In this arrangement, the trust instrument would require the several trustees to agree unanimously or by majority before taking any action, allowing the trustees to provide a check and balance on one another.
A third option is to nominate a corporate or professional trustee to serve together with a family member. A professional trustee can provide the oversight necessary to ensure that a well-meaning trustee is not tripped up by technicalities and to prevent a trustee with untoward intentions from being able to damage the trust. This arrangement also allows a client to leverage both the intimate knowledge of a family member with the expertise of a professional, therefore fulfilling the Settlor’s specific intentions in a way that maximizes the benefits of creating a trust.
It is important to consult with a professional to address issues related to a choice of trustee and trust administration generally. Please contact the Private Client Services Group at Wilchins Cosentino & Novins LLP for further information regarding the topics discussed in this article.
This article does not create and should not be construed as creating an attorney-client relationship.