NAVIGATING THE TRUSTEE DECISION

The following article is reprinted from a series of excellent articles about Transferring Your Legacy in UNION BANK THE PRIVATE BANK Perspectives August, 2020 (union bank.com )

Navigating The Trustee Decision: Understanding The Pros And Cons Of Selecting An Individual or Corporate Trustee

Ensuring the health and safety of your assets as they pass to the next generation is no small task. There’s a lot to consider, and it’s easy to make a mistake in choosing a successor trustee. For example, although your eldest son is fully expecting to wear the mantle, you have reservations about the sibling discord that your three children have never completely outgrown. On the other hand, if you steer away from appointing a family member and opt for a professional or corporate trustee, how could they be expected to step right in and successfully maneuver the dynamic between your children who, as beneficiaries, would need to be in accord with an outside trustee’s recommendations?

Choosing the right trustee for your estate right out the gate is critical because there is so much that requires careful attention, the stakes can be high, and errors can be costly and cause delays. To help you more confidently navigate your way to a final decision, this article outlines the duties of a trustee, the potential consequences of inattentiveness or neglect, and the pros and cons of choosing a corporate versus a personal trustee.

Understanding the scope of the job

Like anyone you’re looking to pass the baton on to, choosing the right trustee first requires a full understanding of the job you expect them to perform. Here are three things about the duties of a successor trustee it helps to know as you begin your search for the right candidate:

1. It’s complicated.

Among a host of other duties, the job of successor trustee includes overseeing investments to make sure they are managed prudently, provide competitive returns, and are appropriately diversified to deliver reasonable growth at minimal risk. The trustee must faithfully follow the trust document, keep accurate records, report to the beneficiaries while treating all of them impartially, and never use trust assets for personal benefit.
One capability you should evaluate upfront is what level of expertise you think your estate requires. For instance, are your assets difficult to value, such as art and antiques, farm and ranch assets, royalties, hedge funds or other complex assets? Not only are these types of diverse assets difficult to value, many can expose the estate to high levels of risk, including environmental liabilities, as well as involve unique forms of documentation. Here’s where a strong track record and extensive experience and resources can ultimately make a big difference in terms of both time and money.

Case Study

The “clueless” trustee

Randy is sole trustee for his parents’ sizable estate, valued at $20 million, and largely invested in income-producing real estate properties. His only sibling, Charles, passed away before the parents, leaving Randy responsible for the care of his brother’s share for his three children, one of whom is special needs.
With only about $1 million in cash and securities and an estate tax exceeding liquidity, assets would need to be sold to pay the tax. Randy has yet to get around to doing anything about this, nor has he done anything to segregate assets for his brother’s children. What he has done, however, is make a $400K loan to his own son, tapping into the estate’s assets without either informing the other beneficiaries or acquiring court approval.
Although there have been no formal complaints from the other beneficiaries yet, Randy stands a good chance of finding himself at serious fiduciary risk: his record-keeping is poor, he has blended assets, and has put no plan in place for the care of his special-needs nephew.

2. It demands a comprehensive approach.

There’s no wiggle room here to attend just to the tasks your trustee finds interesting or feels most comfortable doing. It’s a big job and an important one, with many responsibilities, including:
• Valuing the estate, including cash, business interests, personal items, securities and real estate
• Managing all property, interests and assets
• Paying all debts, bills and obligations, including selling appropriate assets to settle debts
• Completing all tax returns
• Ensuring all cash flow needs, particularly if there’s a need for long-term care for any length of time
• Safeguarding any income
• Governing and/or managing operating businesses
• Investing money not needed immediately in a prudent way
• Collecting and safeguarding all valuables
• Insuring all properties
• Selling or transferring real estate
• Determining the fair division of all personal and real property

3. It’s time-consuming.

Every trust situation is different, but the many responsibilities outlined above can consume a lot of the trustee’s time. This is especially relevant when naming a family member as successor trustee since they may well be juggling other demanding responsibilities, such as a full-time job and family.

Understanding the potential consequences of neglect or even inexperience

It’s important to know that, no matter which direction you take, all successor trustees are held to a fiduciary standard. That means they are required by law to be the caretaker of your rights and assets and/or provide for their well-being as outlined in the trust. As such, the successor trustee must carry out responsibilities to you, the grantor, and your beneficiaries with the highest degree of care, honesty and loyalty. Whether a personal or corporate trustee, if they fail in this regard, they can be held legally liable.
“A lot of family members who take on this role think they’re immune from liability because they’re not getting paid,” says Carlee Harmonson, Fiduciary Management Executive and Managing Director, Union Bank. “But that doesn’t matter. The court will hold them to the same responsibility level as a corporate trustee.”

Case Study

The “bickering sibling” co-trustees

Siblings Bob and Shirley have been in conflict ever since the death of their father 15 years ago led to their appointment as co-trustees of the family’s $22.5 million estate, which includes the primary home, three investment properties and significant cash and securities.
Their poor relationship has led to a stalemate on almost every estate decision they’ve had to make and, because they have equal authority as co-trustees, concurrence is needed for any decision big or small, from bill payments and maintenance costs on the properties to investments and the cost of care for their mother.
Although the parents were well aware of their children’s volatile relationship, they concluded that making them co-trustees would force a workable detente between the two. In reality, this wishful thinking on the part of mom and dad subsequently exposed their estate to deterioration of the investment properties due to inaction and significant litigation costs.

Making the first cut

You can help clarify the decision upfront as to whether a personal or corporate trustee would best serve the needs of your estate by asking yourself a set of 8 questions.
Is your candidate…
1. Able to perform the full scope of duties required to fulfill their fiduciary responsibilities, including investment management, accounting, record-keeping and tax reporting services?
2. Experienced in dealing with specialized or unique assets, such as real estate, art, jewelry or business interests?
3. Fully capable of protecting the trust assets for future generations?
4. Able to make objective decisions in administering the trust and take quick action under any situation?
5. Able to act impartially when working through issues where the beneficiaries don’t see eye to eye?
6. Able to perform long-term administration for multiple generations?
7. Capable of managing the trust in the most tax-efficient manner?
8. Possess sufficient resources sufficient to compensate the beneficiaries for an error, even one resulting from inexperience?

The comparison below highlights those benefits and drawbacks most common to personal trustees, such as a family member or close friend, versus an outside professional, such as a member of your financial team, your attorney or accountant, your bank, or other professional fiduciary adviser.

Case Study

The “big brother knows best” trustee

Eldest son, Joe, a highly successful businessman, had no doubts that he would do an equally good job as trustee for the family estate, valued at $6.5 million. Rejecting professional guidance, he had a plan that he felt required no buy-in from brother Mark and sister Jill. And this is where the trouble began.
Although Joe had decided to keep the estate’s real estate holdings, a family cottage and an apartment building, his less successful brother and sister wanted to liquidate the properties in “as is” condition. But Joe charged ahead with his plan, engaging a contractor for significant repairs to the tune of $400K. Not surprisingly, Jill and Mark sought out an attorney, incurring significant legal expenses against the estate and irreparably damaging the relationship between the siblings.

Can you have both a personal and corporate trustee?

If you like certain aspects of a personal trustee, but worry about lack of experience, and also like certain aspects of a corporate trustee, but aren’t confident that an outsider can manage the family dynamic, you can set up an arrangement whereby a personal and corporate trustee work in partnership as equal but separate co-trustees. This is especially advantageous in situations where important decisions need to be made or special situations need to be managed.

This approach can benefit both personal and corporate trustees. The personal trustee, who normally maintains a better understanding of the uniqueness of each family member, can educate the corporate trustee and act as intermediary for other beneficiaries. The corporate trustee, on the other hand, can provide those specialized services where experience can make a big difference, such as investment management and tax preparation, as well as offer the advantage of negotiated pricing efficiencies for estate administration and liquidation services.

Finally, this dual approach brings a stronger element of continuity to the management of your estate by allowing one trustee to back up the other in the event of resignation or passing.