Trusts and Estates: 7 Steps to Designing the Perfect Trust and Estate Plan- Part 5

Welcome back – this is the third in a series of four posts so if you missed either of the previous posts or just want a refresher:

Click here for Part 1 (steps 1 & 2).

Click Here for Part 2 (steps 3 & 4).

The seven steps in this series will guide you through the process of building a working outline for a thoughtful and successful trust document.

In Step 1, we started with Why – figuring out your main purpose or motivation for including one or more trusts in your estate plan. In Step 2, we worked on the Who – listing and describing the people (and possibly charities) your trust will benefit. In Step 3, we talked about the frequency, amounts and types of distributions from the trust to your beneficiaries. In Step 4, we looked at building some much needed flexibility into your trust document, which could be in effect for hundreds of years.

And now . . .

Step 5 – Select Your Trustees

Selecting your trustee is an important step

Selecting your trustee is an important step

This step is so important that we have devoted the entire post to it.  The trustee is the person (or company) whom you designate to carry out your wishes by following the trust agreement.  It is one of the most challenging steps we all face, understandably so.  Hopefully, this information will make it easier.

Let’s take a minute to take a quick look at trustees. What does a trustee do?

For starters, the trustee is the legal titleholder (owner of record) of all trust assets. The beneficiary is called the “beneficial” or “equitable” title holder. This means that trust assets exist for the beneficiary’s use and enjoyment, but the trustee is the person responsible for managing, investing and/or buying or selling those assets, plus all the decision-making that accompanies those responsibilities. Guided by your trust agreement, the trustee makes all the decisions:

  • Distribution decisions – when and how beneficiaries will receive payments;
  • Investment decisions – how trust assets will be invested and managed; and
  • Ownership decisions – which assets should and should not be owned by the trust.

However, the trustee is a fiduciary, which means he or she is prohibited from using trust assets to benefit him- or herself in any way.  To ensure that this happens, the trustee is subject to a number of important duties and responsibilities that have evolved over the years. (Click here for an overview of the trustee’s duties.)

Now, back to the business of selecting trustees – what are your options?

There may be one or more trustees serving at any time. If you want more than one, it’s a good idea to use an odd number, so you don’t wind up with deadlock if there’s a disagreement. I refer to the singular trustee for simplicity here.

You will choose the first trustee, who will serve right away. This may even be you, if the trust is revocable while you’re still living. A successor trustee serves after the first has resigned, died or become incapable. You get to pick the successor trustee too. You can also pick an alternate if the one you chose ends up being unable to serve. And, you also decide how the trustee will be selected if no one you picked is able to serve, and you’re not around to pick another.

There are different kinds of trustees:

  • Individual Trustees (humans): This is the most common approach, often because the individuals chosen are part of or are closely aligned with the trust creator and family.
  • Corporate Trustees (companies): These are common in cases where there is no good individual choice available or where conservative investment and spending management are desired.
  • Private (Family) Trust Companies (hybrid): Becoming more common recently, these combine the perpetual nature and structure of a company with the flexibility provided by its family-member owners.

Now you know what the trustee does and what the potential types are.  So how do you choose?

Individual vs. Corporate Trustee?

There are pros and cons to both.

Individual trustee – Pros:

  • Alignment – choosing an individual trustee usually means choosing someone who knows the family, and knows the trust creator’s goals and purposes;
  • Attention – individual trustees tend to be more hands-on; they often handle only the trust in question, or at most, a handful;
  • Flexibility – due to their knowledge of family history and dynamics, individual trustees tend to be more willing to consider “out of the box” factors in making investments and distributions.

Individual trustee – Cons:

  • Succession – individual trustees die; they also get sick, become disabled or maybe just cranky;
  • Limitation – individuals are only human, perhaps with a small support and advisory team, so their resources, reach and capabilities are limited;
  • Litigation – an individual may feel more pressure to bend under the threat of litigation from beneficiaries or fail to bend when he should, consuming trust assets in his defense.

You might ask, “Aren’t the pros and cons of corporate trustees pretty much the opposite of those?” Why, yes, they are.  But we’ll run through them quickly just to make the point(s):

Corporate trustee – Pros:

  • Continuity – a corporate trustee does not die (although it may get killed and eaten by a larger one);
  • Resources – big budgets, deep pockets, systems, lots of staff;
  • Consistency – policies and procedures ensure consistent, objective beneficiary treatment.

Corporate trustee – Cons:

  • Bureaucracy– these entities, with their committees, boards, policy meetings, etc., tend to move slowly;
  • Turnover – many trust officers are in the process of moving through careers, and the best get promoted to management, leaving the family with a new primary contact every few years;
  • Conservative – institutional memory of litigation tends to cause reluctance to reach for the best outcome if it means possible exposure or criticism.

So there you have the basic differences. Of course, every individual is different; every corporation is different.

How do you find an individual trustee?

As a practical matter, if you want an individual trustee, you need to know the person you’re going to ask. Ideally, you will have known this person for a long time. Your would-be trustee must also be thoughtful, care about you and your family, and be savvy in financial, business, legal and tax matters. Who then? Perhaps a longtime business partner or senior employee? An old family friend? Your trusts and estate planning attorney? Your accountant? Another professional advisor? Maybe you’re related to one of those individuals?

These are the most obvious choices. If you have someone in mind who meets these criteria, you might consider asking that person to become your trustee. Be sure to discuss compensation, and your attorney can give you guidance there. Also (and this is frequently overlooked), choosing a contemporary of yours is risky if you’re both getting up there in age.

Of course, not everyone knows such a thoughtful, trusted and talented person. Or, if you do, he or she may say “No thanks!” (it’s a big job). If that describes your situation, you’ve got plenty of company. You’ll need a corporate trustee.

How do you find a corporate trustee?

You interview a few corporate trustees to look for the right fit. Ask each of your advisors to personally introduce you to 2 or 3 recommendations. You’ll want to know the corporate trustees’ investment track record and the types of investments they permit in their trust accounts. You’ll also want to know their procedures, policies and guidelines concerning trust distributions.

Ask them to tell you stories about difficult family or beneficiary relationships they have had and how they handled them. Treat these like job interviews. (You are hiring them, after all.) Of course, ask about compensation as well. Each corporate trustee should have a published rate schedule.

What about that Private (Family) Trust Company you mentioned?

Sometimes called “private trust companies,” or “family trust companies” (“FTCs”), these entities are a relatively new development. Actually the concept has been around for at least a hundred years or more, but these entities have gained popularity recently. The FTC is just as it sounds – a trust company set up by you and your family to serve only the trusts created by you and your family.

The FTC is usually a corporation or LLC with a family board that makes all decisions pertaining to the family’s trusts. Often these boards will form committees to handle different areas, like investments and distributions.

A number of states have enacted or are working on laws to enable families to set up FTCs, so they can’t be created just anywhere. In fact, Florida just recently enacted its Family Trust Company Act, something that we’ve been intimately involved in.

FTCs fit best for families with substantial wealth; often these families already have or are in the process of setting up a family office. Let us know if this idea appeals to you and we can answer your questions and help you formulate a plan.

Wrapping Up Part 3

The trustee is the “straw that stirs the drink” (sorry, Reggie).  So give your choice a lot of quality thought. Sleep on it. Talk to your advisors. Talk to your family. But, as noted at the end of Part 1 and Part 2, don’t worry about every last detail right now. Just make some notes on the trustee concepts and ideas above that appeal to you, and those that don’t. And add those notes to the notes from the previous parts.

Remember, you’re building a framework that you can fill in with your attorney’s help later.

In Part 4, we’ll bring this series to a close by looking at the single most important thing you can do to help your trustee and your family: providing trustee guidance. Then we’ll wrap it up with some final steps leaving you with comprehensive guidance on Creating the Perfect Estate Plan.

We look forward to sharing more information with you to help you plan for your family’s future. Visit our website or call us at 239-206-3454.

Oakstone Law is dedicated to helping clients build a solid future by offering a range of services focusing on estate planning and settlement (click here to view our services). Headquartered in Naples, Florida, the practice offers fair, fixed Client Service Packages, eliminating the traditional hourly rate structure (and headaches). Oakstone Law was founded by attorney Robert Kleinknecht, member of the Florida Bar and Massachusetts Bar. Bob has 15 years’ experience, including serving as a personal, in-house estate, tax and charitable planning attorney for a Forbes 400 family. He also previously served as an estate planning and estate settlement attorney with prominent firms in Boston and Washington, D.C. Click here to ask us a question, or click here to contact us directly.

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1415 Panther Lane, Suite 439
Naples, Florida 34109
Tel: 239.206.3454