Odds are you have clients with one or more trusts. Here are some issues for them to consider—and they likely will be grateful to hear from you about these issues.
The recent passing of well-known celebrities such as Aretha Franklin and Prince has refocused public attention on the importance of estate planning. Basic estate plans typically include wills and powers of attorney. In many states, revocable (modifiable) trusts also are appropriate.
What is a trust? It's an agreement between two parties to hold assets for the benefit of a third. The grantor of a trust is the originator of, and the contributor to, the trust. The beneficiary is the individual or organization that is entitled to the trust proceeds: income, principal or both. The trustee is responsible for carrying out the wishes of the grantor and properly investing and distributing trust assets to beneficiaries.
Each state has its own laws controlling the creation and administration of trusts, and provide for the minimum required qualifications for trustees. All states require that trustees be adult individuals or be state- or federally-chartered institutions, such as trust companies. Trusts can have one or more trustees serving simultaneously. Often, grantors provide a list of possible trustees so it is clear who will serve as a successor trustee if one of the named parties passes away, decides not to accept the position or otherwise is unavailable. There is efficiency in allowing one trustee to administer the trust, but there is balance in having a committee of two or more decision-makers. The “right” number of trustees to appoint depends upon the wishes of the grantor, the complexity of the management responsibilities and the number of people whom the grantor knows who would be a good fit for that role.
While it is an honor to be named as trustee, it can be a tremendous amount of work—and potential liability. Trustees are required to inventory, prudently manage, and distribute or retain trust assets, usually with very specific instructions that are contained in the trust document. Throughout the administration of a trust, regular reporting (and accounting) to the beneficiaries often is required. A poorly performing investment or an unpopular decision to distribute or withhold trust assets can generate animosity between trustee and beneficiary. A complete listing of a trustee’s duties is far beyond the scope of the article. Suffice it to say, though, that a trustee is held to a higher standard of responsibility for trust assets than the trustee is for the trustee's own personal assets.
Individual trustees commonly are family or friends of the grantor, and provide personal knowledge of the grantor’s intent and the needs and idiosyncrasies of the beneficiaries. Corporate trustees (i.e.; trust companies) bring experience and expertise to the trust administration by way of company employees who possess great personal and/or institutional experience. The desires of the grantor dictate the proper choice of trustee(s), but one major benefit of having a trust company as a successor trustee is in the event that other successor trustees are unavailable. Additionally, a corporate trustee can serve jointly with another trustee (say a relative or a family friend), thereby adding expertise and professional protocols to the process.
In any case, the work of a trustee (individual or institutional) and the potential for liability justify the fee to which the acting trustee is entitled. The amount of the fee may be provided in the trust document or simply limited by a “reasonable” standard, considering factors like work performed, asset complexity, beneficiary demands and trustee experience. A grantor may request that a trustee serve without compensation but, of course, the trustee may decline. In addition, even a trustee of a trust that does provide for compensation may decide to serve without charge.
Again, it is an honor to be named as trustee but the time and duties required can be onerous. In all cases, your clients should discuss the benefits and pitfalls with professional counsel before the decision to accept the trustee's position is made. If your clients are considering using a corporate trustee as a primary trustee or successor trustee, they should be sure to have that trust company review the trust during its creation, to avoid finding out later that it does not meet the criteria for the trust company to accept the position.
Tim Lappen is a partner in the law firm of Jeffer Mangels Butler & Mitchell LLP. He is the founder and chairman of the firm's Family Office Group and its Luxury Home Group. He may be reached at [email protected].