Estate planners have long focused on minimizing their clients’ taxes, and that’s been a laudable objective. However, given the high federal estate tax applicable exclusion amount and portability, estate tax planning has become largely obsolete for a sizable majority of the population. In a post-American Taxpayer Relief Act of 2012 world, non-tax estate planning considerations should receive greater emphasis.
Among the aspects of designing an estate plan that deserve the most attention, although often relegated to an afterthought, is carefully identifying who would be most qualified and effective in the roles of trustee and successor trustees. Lawyers can prepare estate-planning documents of superb technical quality, but, if the fiduciaries entrusted to implement the directives in those documents are inappropriate, the client’s estate-planning goals will likely fail to be achieved, and they could even blow up entirely.
Who’s best suited to serve as a fiduciary depends, of course, on the circumstances, which can vary dramatically. There are numerous factors that should be taken into account and analyzed in selecting a trustee.
What are the primary and secondary purposes of the trust? Such purposes might include: providing professional investment management, asset protection, tax minimization, protection of beneficiaries from their own financial improvidence, preservation of assets for the enjoyment of multiple generations and encouraging beneficiaries’ positive behaviors and choices, while discouraging negative ones.
Who will be the beneficiaries of the trust? The beneficiaries may consist of individuals who, because of mental or physical disability, or because they’re not adults, would be unable to manage assets for their own benefit. A beneficiary could have a difficult personality or be a spendthrift. A beneficiary’s age, health status, position in his family, personal financial situation and other characteristics will likely impact trust administration decisions.
What are the dispositive provisions of the trust? There are myriad alternatives. The dispositive provisions could be relatively easy to administer, to the extent they don’t involve the exercise of discretion, for example, mandated periodic payments of income or a unitrust amount, powers of appointment or withdrawal held by beneficiaries. On the other hand, it will be more challenging to administer a trust if income and/or principal may be distributed to or for the benefit of one or more beneficiaries, either pursuant to an objective standard or in the trustee’s sole and absolute discretion.
What’s the anticipated duration of the trust? It could be expected to remain in place for a few years or to last for decades or longer.
What types of assets are anticipated to be held in the trust? The trust might consist of relatively easy-to-administer assets, such as financial instruments or cash, or perhaps it will hold trust property that will be more challenging to administer, such as residential property, farm or ranch property, valuable tangibles, mineral interests or equity in a closely held business.
What will be the aggregate value of the trust? An individual who might be a good choice as trustee of a trust holding thousands of dollars worth of assets might be inappropriate as trustee of a trust worth millions of dollars.
Does the individual under consideration as trustee possess sufficient expertise and the necessary experience to do the job? While the trustee may engage agents and assistants to provide expertise in an area of trust administration in which the trustee may lack it (for example, investments), the trustee is ultimately responsible for exercising prudence in selecting the agent, establishing the scope of the delegation and periodically reviewing the agent’s actions.1
Is the proposed trustee independent, or does the proposed trustee have an inherent conflict of interest? Such a conflict could arise in at least two ways. First, the proposed trustee could have a beneficial interest in the trust.2 Second, the proposed trustee could have a personal economic interest in the trust assets.
Does the trustee have an appropriate fiduciary demeanor? Trustees often must make difficult choices. Whether a resolution may be right or wrong is rarely objectively certain. In addition, a conclusion may please one or more beneficiaries while causing distress to others. To be successful, a trustee must possess the judgment to make prudent assessments and have the resolve to make and defend decisions in the face of possibly aggressive opposition.
Will the trustee being considered be around long enough to see the job through? Unless the trustee under consideration is a corporate fiduciary, the age and health of a proposed trustee is important to take into account.
Where’s the proposed trustee located? Having a trustee in close geographical proximity to the beneficiaries, while not necessarily indispensable, may be conducive to smooth trust administration.
Will the trustee expect to be paid? The cost of trust administration is an important factor. However, trust administration is never free. Even if a non-professional trustee isn’t compensated, he’ll have to pay to engage third parties to render services in administrative areas in which he lacks competence.
Is the trustee accountable? If the trust experiences losses caused by the trustee’s malfeasance, can the trust and its beneficiaries be made whole? If a corporate fiduciary is serving or if an individual trustee is bonded (which is exceedingly difficult to accomplish), the answer is “yes.” Otherwise, depending on the amounts of the losses, the answer could easily be “no.”
Designating initial and successor trustees is among the most critical elements of the estate-planning process. It’s often not treated as such but should be. The best estate planners understand this reality and skillfully guide their clients through a thoughtful and deliberate trustee selection process.
1. See Section 9 of the Uniform Prudent Investor Act.
2. For a recent example of the results of seemingly horrible trustee selection, see Carter v. Carter, 965 N.E.2d 1146 (Ill. App. 1st Dist. 2012), appeal denied, 968 N.E.2d 1064 (2012), wherein the trustee, who was also the sole income beneficiary of the trust as well as the stepmother of the remainder beneficiary, invested the entire trust property in tax-free municipal bonds and, amazingly, was held not to have breached her fiduciary duties to the remainder beneficiary.