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Choosing The Best Trustee

In 2005 a trust beneficiary filed a law suit against her trustee (her father) claiming that her father illegally transferred $2 billion of her money to a trust for another beneficiary.

The case was settled for just under $1 billion.

Fact or Fiction?

In this case, fact.

The father and daughter in this story are members of the Pritzker family (Hyatt Hotels, etc.) and while the story involves famous people, it highlights the need for care in choosing trustees for yourself and your loved ones.

For those readers who already have a living trust, it is likely that you are serving as your own trustee and will continue in that role as long as you are willing and able to do so.

But what if you are not serving or can’t serve?

Before we talk about how to choose the right trustee, let’s talk about what a trustee does.

A trustee is the legal owner of assets held in trust. When you establish a trust, you could choose to be the trustee of your own trust while you are alive and able to take care of your own finances.

Upon your death or in the event of your incapacity, a “successor” trustee that you have previously chosen would step in to take over control of the assets held in your trust.
The trustee is required to use the assets only for the benefit of the trust beneficiaries, who are determined by you. In the event you are incapacitated and still living, you would more than likely be the beneficiary of the trust. If you are no longer living, the beneficiaries receive your assets as described in the trust.

The chosen trustee will have control over how the assets are invested. They may also be responsible for making distributions to the beneficiaries and ensuring that tax returns and other filings are done correctly.
With that in mind, what should you look for in a trustee?

Trust-Ability

This is probably the most important consideration of all. Your trustee must be trustworthy. If you pick someone who can be trusted, you are at least half way home. Keep in mind, not all trustees need to be related to you.

Ability to cooperate

In many cases you will choose to have more than one trustee serving at a time. It is important that trustees are willing and able to cooperate with each other in order to fulfill the purpose of the trust. Someone who is unwilling to listen and discuss issues honestly and openly may be a bad choice for trustee.
Willingness to seek advice

In today’s world, a trustee needs to make decisions involving accounting, investments, law, tax and other areas.  Being an expert in each of these areas is just not possible. So a good trustee will seek advice from other experts. Look for a person with a history of seeking competent advice and making good decisions based on that advice.

Administration skills

A good trustee will have (or hire) good administration skills. They should either be good with details and organization or have someone in their life that takes care of the details for them. Finding someone that crosses every “t” and dots every “i” is important.

Financial experience

A good trustee will have some financial experience. They do not need to be expert investment managers, as that skill can be purchased. What is important is for a trustee to be able to listen to investment advice and be able to determine when that advice is sound or not. The fiduciary obligations required are a legal commitment to you and your family.

Understanding of family history and culture

Depending on whether the trust is designed to be in existence for a long period of time, this ability to know the family, know how the matriarch and the patriarch  made their money and how they used it to raise their children can be very important in carrying on that family culture to future generations. A trustee should know about your family’s values.

Ability to dedicate time

While a first choice for trustee might be one or more of your children, you need to be realistic about how much time each child can devote to trustee duties. Your children may have young children of their own to raise and they may have careers to pursue. They may have every trait required of a good trustee, but for the fact that they have little time to devote to the job. In these situations, it is critical to have a discussion with them before naming them as trustees.
Of course as your children get older and their lives change, they may become better suited to the job of trustee.

Common sense

A trustee’s job involves some technical duties, such as tax filing and accounting, but for the most part, it requires decision making ability. You want someone who can deal with issues on a practical level and someone who can bring life experience to bear. What you don’t want is someone who will spend $5,000 to get advice on a $1,000 decision.

Legal Age/Competency

Trustees have to be of legal age and sound mind in order to serve as a trustee.

US Citizen

In some cases, you will want to make sure that your trustee (or at least one of them) is a US citizen.

Naming a non-citizen as a trustee can create income tax problems as well as estate tax problems. If you intend to name a non-US citizen as a trustee, know that in most cases, adding a US citizen as a co-trustee will solve these problems.

Airplane owners should know that in order to register an airplane in the US, the FAA requires that the owner be a US citizen. Likewise, if an airplane is owned by a trust in the US, at least one of the trustees must be a US citizen.

State residency

Creating a trust in certain jurisdictions will require you to have at least one trustee from that jurisdiction. For example, trusts created in Alaska, South Dakota, Nevada and Delaware (popular for asset protection and dynasty trust planning) all require at least one trustee to be a resident of the state.

Healthy

While future health is not guaranteed, it best to pick a trustee who is healthy today and who does not have a history of serious health problems.

Any sustained inability to perform trust duties can have a negative impact on the trust and the trust beneficiaries.

A world view like yours?

Like health, world views can change. But if you have specific ideas about how money should be managed or distributed, choosing a trustee who shares your view is one way to help ensure that the intent of the trust –your intent- will be fulfilled.

Willingness to serve

Of course, it is important to pick a person who is willing to perform the duties of trustee. In many cases, you are not legally required to inform a person that you have named them as your trustee, but it makes sense to do so nonetheless. If for no other reason than to determine that they agree to take on the responsibility.

Even the best laid plans can go wrong, but thinking through how your trustees measure up will always give you (and your trust) the best chance for success.

In a future article, we will look at the wisdom of using multiple trustees, and the relative advantages of using family members, friends, professionals and institutions to serve as trustees.

Of course, if you would like to talk about choosing trustees for you and your family, click here to have our office call to set up a time to discuss this with you.

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The information contained on this web page is general by its nature. For that reason, no one should take any action based on the information contained in this webpage until having consulted a competent professional advisor or advisors. Nothing contained in this web page was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties under the Internal Revenue Code. No information contained on this webpage relating to any federal tax matter may be used by any person to support the promotion or marketing or to recommend any federal tax matter. Taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter described on this webpage.

 

 

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