Using co-trustees may be the most effective choice.

Second in a two-part series

Editor's Note: Part 1 of this series looked at the advantages and disadvantages of individual trustees vs. corporate trustees. Part 2 takes a closer look at some key issues in the selection process.

In deciding which type of trustee is most appropriate for a given circumstance, it is appropriate to consider how trustees are typically compensated. In most states, in the absence of a provision stating otherwise in the governing instrument, the trustee is entitled to "reasonable compensation" for services rendered. What constitutes reasonable compensation may be subject to differing interpretations and, in the event of an irreconcilable dispute, would be determined by a court.

Frequently, amateur trustees may waive some or all of the fees to which they would otherwise be entitled under state law. However, an amateur will have to employ many agents and assistants to help provide comprehensive trust administration services. These agents and assistants will include a lawyer, an accountant, an investment advisor and may include others as well. Thus, employing an individual trustee, even if that trustee does not collect a trustee's fee, does not result in free trust administration and may not even be the least expensive trust administration option.

Corporate trustees generally charge fees for their services in accordance with a published fee schedule, and most corporate trustees require that their then-prevailing fee schedule be referenced in the governing instrument of the trust as a prerequisite to their agreeing to serve. The fees that would be charged by a corporate trustee in some cases are prohibitively expensive, especially for smaller trusts. Individual trustees who are professionals, such as lawyers and accountants, generally charge fees for trust administration services in accordance with their professional hourly rates. Some corporate trustees, when asked to serve along with an individual co-trustee, charge higher fees because of the additional work required to coordinate decision making with another party.

When considering the selection of an individual trustee, it is important to consider that individual's relationship with the beneficiaries, the age and physical condition of the potential trustee and his or her willingness to serve. The individual trustee's geographic location should also be considered. Ideally the trustee will live near the testator or grantor and/or the beneficiaries, so that he can be of more immediate assistance as and when needs arise. The testator is the creator of a trust (the person who signed the document under which the trust is established and who provides the assets with which the trust is funded) under a will. The creator of the trust that comes into existence during the creator's life is usually referred to as the grantor or settlor, and a trust established under a revocable trust instrument or irrevocable trust instrument is often referred to as an "inter vivos" trust.

Where a trustee resides may also have impact on whether the trust is considered a "resident" trust for state income tax purposes. Another concern with respect to selecting an individual trustee is whether such trustee is also a beneficiary. The trustee who is also a beneficiary may find it difficult to make impartial discretionary distribution decisions, and unless the governing instrument of the trust is carefully drafted, the trustee's ability to make unrestricted discretionary distribution decisions could result in estate, gift and income tax consequences. When choosing a corporate trustee, the testator or grantor should ask for referrals from trusted sources, such as a lawyer or accountant, and should conduct interviews with a representative of each corporate trustee candidate. Information that should be sought about a given bank trust department or trust company includes: how long the institution has been in business, the size of its staff, the rate of employee turnover, the institution's equity and fixed-income portfolio performances over varying time frames, what criteria are used in making both investment decisions as well as discretionary distribution decisions, how it manages risk, what expertise it has in managing the particular kinds of assets belonging to the testator or grantor, and the basis upon which it charges fees. In an inter vivos trust, the grantor of the trust should meet the individuals who would be assigned as administrative and investment officers for his account and learn about their credentials and how many accounts they are responsible for.

To achieve a balance of sensitivity to family needs and dynamics, as well as mechanical trust administration expertise and experience, some testators and Grantors decide to name co-trustees, combining an insider with a professional. Common pairings include a family member and a trusted advisor, a family member and a bank trust department or trust company, and a trusted advisor and a trust department or trust company. Unless the trust instrument provides otherwise, in general, co-trustees together hold legal title to the trust assets and potentially have joint and several liability if problems later develop in administration of the trust. If a testator or grantor does not wish to employ co-trustees, an alternative to that approach would be to name a trust advisor with whom the designated trustee could consult. The trust advisor would supply nonbinding guidance and, in general, would not have the same level of potential liability or responsibility as the trustee would have.

Under certain circumstances, a trustee may be removed and replaced with a more appropriate trustee. Well-drafted wills and trust instruments contain provisions that allow designated persons to remove and replace trustees under delineated circumstances. If the trust document's provision is inapplicable, or if the document does not contain a provision allowing for removal or replacement, trust beneficiaries may apply to a court of equity to seek an order that the current trustee be removed and replaced with a more suitable trustee. A court will remove and replace a trustee if a serious breach of fiduciary duty or a conflict of interest has been shown.

It is important that while the testator or grantor is alive and not incapacitated, the will or trust instrument is regularly reviewed and updated so that its dispositive and administrative provisions, as well as the provisions designating who shall be the trustee, reflect the testator's or grantor's current desires. Most important, a well-drafted trust instrument always contains a comprehensive succession of trustees. If a given individual, who is designated as a trustee, dies or has died, or is or becomes incapacitated or unwilling to serve, a replacement trustee should be designated. If that replacement trustee is an individual, then the replacement for that individual should be designated as well. In most cases, the ultimate back-up trustee should be a bank or trust company. In no circumstance should a will or trust instrument be prepared in a manner so that there is the likelihood that the succession of trustees will be incomplete and a court will ultimately have to step in and appoint one or more successor trustees.

Ultimately, the question that remains is which type of trustee is better? In most cases, it seems to work best if a co-trustee tandem exists between a professional trustee and an individual trustee who is a family member or close friend. In most cases, subject to regional variations relating to long-standing custom and practice, the best choice as the professional trustee is a qualified and experienced bank trust department or trust company. It should be remembered that while individual, non-professional trustees may seem to be the least expensive trust administration option, the use of individual amateur trustees is often not materially less expensive because they need to employ agents and assistants to carry out trust administrative functions for which they lack the ability and expertise.

An experienced, high-quality corporate trustee has experience, expertise, orientation and a level of objectivity that, in most trust administration situations, make such a trustee indispensable. To the extent that the corporate trustee lacks the intimate knowledge of family relationships and dynamics, having a close family member or friend serve as co-trustee with the corporate trustee effectively fills that void, and, together, they provide an ideal trusteeship.

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