Trusts have been part of the estate-planning vernacular for more than 1,000 years, but the demands being placed on the trustees who administer them may be greater than ever.
That means it is critically important that advisors and their clients only appoint a trustee after careful consideration. It also means clients should think twice about asking a trusted family friend or "wise" uncle to fill the role.
The important role a trustee plays in an overall estate plan can't be overstated. Clients, for example, routinely expect trusts to carry on a family-owned business or carry out an estate plan for multiple unborn generations. At a minimum, a failure to understand the salient factors in selecting a trustee can result in missed opportunities. At worst, it can result in a failure to achieve estate-planning objectives, with irrevocable implications to the client's family and others.
There is a tremendous body of work describing the office of the trustee, many of which would be helpful in evaluating potential trustees. For example, Lord Chancellor Hardwicke, writing in the 1747 case of Knight v. Earl of Plymouth, noted the following: "For as a trust is an office necessary in the concerns between man and man, and which, if faithfully discharged, is attended with no small degree of trouble, and anxiety, it is an act of kindness to accept it."
Hardwicke neatly captured the magnitude of the trustee's responsibilities and the dedication and commitment that's needed to serve in that capacity. It would take another essay to address the basic fiduciary duties of a trustee, but suffice it to say that the trustee cannot take his or her responsibilities lightly. Even seemingly simple trusts require a thoughtful and thorough approach.
For example, a routine trust intention is as follows: "Income to my surviving spouse for his/her life and on his/her death, the trust will terminate with distribution of remaining property, and undistributed income, to my issue." In this scenario, the settlor often will select a trustee from a group comprising a respected member of the settlor's extended family: the oldest child, a longtime friend or neighbor, a lifelong business associate, or anyone thought to be trustworthy and who is expected to be there for the family at all times. The settlor expects the beneficiaries will be more comfortable with someone with whom they are familiar. The close personal relationship with the trustee is expected to ensure that fulfilling the family's needs is a top priority.
Experience shows, however, that this scenario leads to unacceptably capricious results. Sometimes it works and sometimes it does not. When it fails, the personal relationships can be destroyed and the settlor's expectations compromised and unfulfilled.
It may seem obvious, but the more capable the trustee, the more likely the settlor's objectives will be achieved. The ideal trustee offers the type of personal bond you have with Uncle Charlie and the stellar professional credentials of an estate-planning attorney employed by an established trust company.
Uncle Charlie certainly has a lot to offer: a strong personal commitment and familiarity with the family throughout the trust period, both of which are essential to a successful trust experience.
Yet the trustee's obligations are not a part-time job that can be performed at the occasional family gathering. The lives of the settlor and family are always in motion, forever changing. Investment markets, tax legislation and tactical planning opportunities are also dynamic. To be successful, the trustee must have a thorough understanding of the settlor and his or her family. The trustee must also be able to properly administer the trust, oversee the filing of trust tax returns, manage the trust property and provide the beneficiaries with periodic reports of trust investments and transactions. Even if Uncle Charlie has your family's interests at heart, he may not be willing or able to make the necessary time commitment. When trustees cannot meet these requirements, they must make alternative arrangements, which may trigger additional costs that ultimately reduce the assets available to the beneficiaries.