Without argument, one of the more difficult struggles a family can face is choosing who will provide long-term management of the family assets, especially if a great deal of wealth is at stake. Family elders have to make a painstakingly careful selection of a trustee when they are alive and healthy. Those families inheriting this legacy will suddenly be in charge of a uniquely important pool of assets and they often realize that they need an effective corporate trustee to remove much of the fiduciary pressure they're feeling. But this means the family has to spell out criteria for such a trustee, examining different entities that might take on the job and then performing due diligence on them.
Family representatives of all adult generations and all branches will have to devote time and effort to the final selection. The work requires them to tough out non-fiduciary issues like competing family interests, conflicting personalities and dissimilar lifestyles among its members. The process requires a great deal of communication among family members to be successful.
But even all that is not enough.
After all this work, wouldn't it be unfortunate if the family didn't get the performance it wanted from a trustee simply because all these expectations were not put into writing?
The good news is that there is a simple and straightforward way for a family to make sure the trustee will satisfy them in the long term-the family fiduciary contract. As described by Chicago attorney John Duncan, who coined the term, "The family fiduciary contract is essentially an agreement between the family and the trustee that confirms the trustee's performance promises and the family's expectations."
In choosing a fiduciary, a family might prefer a traditional institutional trust department because of its size and infrastructure. Or they might like a private bank that offers customization, a multidisciplinary approach and family involvement. Whatever the choice, there needs to be a clear understanding of the advantages and risks each bring.
And it is crucial to make sure the advisory team chosen can effectively execute the family's wishes, and that's where the family fiduciary contract comes in.
A trustee has to be sensitive to important family member issues like charitable leanings and goals; be understanding of a family's desire to keep assets-like, say, a ranch-in the family; be cognizant of family goals such as promoting the children's individual development through formal education or life experiences. A viable trustee candidate must be able to explain convincingly how it will follow through on these mandates. And the family must be in a position to make sure that it does.
A lot of what the trustee is expected to deliver will depend on the demands of the family, of course, but it's reasonable to expect that a great trustee will commit its attention to a number of important issues on behalf of the family, not the least of which is detailed reporting of investment performance and the most current financial products and technologies. And the trustee should be able to keep abreast of evolving family needs and be able to respond to them.
The family fiduciary contract is the best way corporate trustees can assure their clients they will get the results the family members want, need and expect. Once defined, those demands that are consistent with law and trust instruments can then be incorporated into the contract.
It's more informal than other law and trust documents, but the contract is still an important component of a vigorous fiduciary process. When combined with the trust relationship's legal agreements, the family fiduciary contract effectively functions as a statement of understanding and accountability. For the family, it defines expectations; for the trustee, it describes obligations.
All of this takes more effort, of course, than the normal family/trustee relationship. And it's always a work in progress. Properly constructed, the family fiduciary contract will be a "living document" intended to keep pace with the family's changing needs and opportunities as they arise.
Here are a few components to include if the contract is to be effective.
An Assessment Of Family ision, Needs And Values
A family concerned about how they use their wealth will find a mission statement useful. Essentially, this deconstructs the family's philosophy and objectives, including the goals of assisting every family member in reaching his or her potential in life. A good trustee can help a family accomplish these goals once they are described.
Are there particular needs for family that should be addressed? For example, do certain members need a financial safety net? If so, the contract can set an appropriate amount to distribute to those people for basic lifestyle needs, including money for stay-at-home parents, education expenses, medical care, religious contributions and certain other discretionary disbursements.
Are there specific values the family would like to see continued or established? If a strong work or charitable ethic is something the family wishes to instill in its members, the contract can include incentives for them such as earned income matching, new business venture support or continued education assistance.
Are there certain social or charitable beliefs the family wishes to promote with its funds and personal activity? Then the family fiduciary plan is the place to provide direction, guidance and clarity to the trustee on these matters. If they are taken a step further and woven into the trust document, these provisions express a family's intent and prevent any misunderstanding.
Identification Of Required Wealth Management And Trustee Skills
The family fiduciary contract can also help the trustee assemble the most effective team to best meet the family's wealth management needs. Such required skills might include a robust investment management platform, integrated infrastructure and technology, and the trustee's ability to do such things as business succession planning. Other attractive qualities include independence and loyalty, good communication skills and the team's ability to customize its services. The family must be able to ask whether, under special circumstances, the trustee can demonstrate good discretionary judgment. And they must also make sure that the team of advisors will maintain and promote the family's objectives and its legacy.
Set Criteria For Success And Accountability
Besides describing services to be performed, the family fiduciary contract should include certain performance goals based on written objectives and stated risk parameters, one of the most overlooked areas in estate planning. The contract can also direct the trustee to encourage family involvement in the trust's operation and set standards and expectations for communication, reporting and accessibility.
Once the contract is complete and the trustee team is formed, maintenance is all that is required. That would include scheduled periodic reviews to ensure that previously established goals are understood and being met, and to make necessary adjustments if they are not.
No Contracts For Life
Finally, Duncan says you should remember that these assets are your family's legacy, not the legacy of the trustee, who must agree that it will cooperate if your family wants to replace it, and will help you accomplish this within the limits of its fiduciary duty to the beneficiaries.
These steps will help make the job as complete as possible. The family that has carefully pursued such a trustee selection and binding process will not be guaranteed a perfect trustee relationship, but they have at least improved their odds for a long-lasting one with an excellent fiduciary.