Trust
Topic - Should a Family Member Serve as Trustee?
One
of my responsibilities is risk management. It's my job
to monitor compliance with the fiduciary obligations
that govern the action of trustees. So, when I recently
attended a conference sponsored by the Association of
Independent Trust Companies, I headed for the session
titled “Fiduciary Liability.”
The
presenter was from an insurance company that covers
professional trustees. He told a story about a recent
$3 million settlement against a trustee of a relatively
conventional personal trust. A husband had set up the
trust to provide income to his wife and son for life.
Upon his wife's death, the trust principal was to be
distributed to the son's children. The trust also provided
that if the son did not have children, the trust would
be distributed to a charity. The trustee invested the
assets in order to maximize income for the widow. Upon
the wife's death, the trustee distributed the trust
to the charity. The son had predeceased her without
issue.
The
charity sued the trustee. Why? On the theory that the
trustee had breached his duty of impartiality by favoring
the income beneficiaries over the charity's interest,
the charity alleged that the trustee should have invested
more money in the stock market .The charity negotiated
an attractive settlement. (I suspect the suit was filed
before the end of 1999).
We
hope the trustee in that story was not a family member.
Asking
a family member to serve as trustee may seem prudent,
but the job may be an unintended Trojan horse. The relative
may be honored by the request and agree that it makes
good sense. However, he or she may be saddled with unexpected
and unwanted burdens, such as:
-
Exposure
to unforeseen plaintiffs. These parties may
be contingent remaindermen like an aggressive alma
mater, spouses of deceased children, or jealous siblings,
to name a few.
-
Confusing
tax implications of trust administration.
Trust tax matters are growing increasingly more complex,
fueled in part by the complexities of funding trusts
with IRA's.
-
Unintended
consequences of administrative decisions.
Actions of a surviving spouse who is trustee can destroy
the estate-tax-exempt feature of a trust.
I
work with professional corporate trustees. Hence, I
may have a bias or two about the business. I am aware
of one such bias. I am part of a group that has spent
years learning our trade, so I would naturally look
askance at do-it-yourself trustees and some of its promoters.
I
have seen basically two types of promoters of do-it-yourself
trusteeship. The first type is a "Relationship
Controller," whose motive is to tether the client
to its own fees in the guise of saving the family expenses
elsewhere. The second type is the "Disheartened."
These are individuals who feel that many corporate professional
trustees are not serving their clients well. This latter
group has witnessed a trend in the trust business, most
notably in bank trust departments and trust units of
brokerage houses, where the trustees' motives seem centered
on selling investment products and increasing fee revenue
rather than maintaining a high standard of personal
service.
Many
attorneys fall within the second category, the Disheartened.
It is understandable that they would want you to avoid
trapping your family in a long-term relationship with
a corporation that may be undergoing a series of mergers
and consolidations that increasingly limit access to
your trustee and substitute a remote "800"
number for local service. In
many instances, it is a good idea to name family members
as trustees as long as there is an infrastructure in
place to support them.
In
this connection, let's take a look at the responsibilities
that need to be supported:
-
Understand
the document and fiduciary law -- To administer
the trust according to law and in accordance with
the trust agreement. In addition to understanding
the document, the trustee should have an understanding
of his or her duties as required by New Hampshire
law, including the rules of fiduciary accounting both
as to common law and statutes such as the Uniform
Principal and Income Act.
-
Compliance
with tax rules and regulations -- To understand
the tax consequences of his or her acts and tax accounting
rules (particularly where they depart from fiduciary
accounting rules), and to file state and federal tax
returns.
-
Maintaining
separate income and principal records --
The trustee has a duty not to mingle trust assets
with non-trust assets and to maintain records that
have separate income and principal ledgers. Further,
the trustee has the ongoing responsibility to:
• Collect all trust receipts and determine whether
each receipt is principal or income, or whether it
should be allocated between both.
•
Pay all expenses and determine whether each expense
is principal or income or allocable between the two.
•
For an income beneficiary, the trustee must calculate
the amount of income due and distribute these funds
according to the terms of the trust.
-
Exercise
reasonable discretion -- If the trustee is
given discretion with respect to a matter, to exercise
that discretion in a reasonable manner.
-
Impartiality
-- To administer the trust impartially for the benefit
of the trust beneficiaries, regarding the interests
of both the current beneficiaries and the remainder
beneficiaries. The trustee must remain impartial and
not favor any beneficiary(s) over another,especially
if he or she is also a beneficiary.
-
Preserve
-- To protect and preserve the assets of the trust
estate.
-
Prudence
-- To invest the trusts assets in a prudent and cautious
manner.
-
Avoidance
of conflicts -- To avoid conflicts of interest,
such as entering into transactions with trust property
that will result in a profit to the trustee personally.
In
a nutshell, family members need:
•
Investment advice from someone who is familiar with
the obligations of a trustee in investing assets;
• Assistance with fiduciary accounting and 1041
tax returns; and
• Help in translating the trust document and assisting
in the ongoing decisions regarding receipts and disbursements.
There
are not a lot of individuals qualified to provide this
infra-structure. However, the family member can also engage
the services of a professional corporate trustee, including
a bank trust department, to act as their agent. In that
case, we recommend negotiating relationships that will
not be difficult to terminate and which will not be subject
to expensive exit fees.
The
family member can also serve as co-trustee with a corporate
trustee. In some situations, this will be a sensible
solution.
However,
there will be many instances when it is advisable to
use a corporate trustee that acts as sole trustee. In
that case, we recommend that if you name a corporate
trustee to serve as sole trustee or co-trustee, then
you would also benefit from giving power to a majority
in interest of the income beneficiaries to replace the
corporate trustee with another corporate trustee. Including
this provision in the trust will increase the likelihood
that the corporate trustee will remain responsive to
family needs. Doing so will also prevent beneficiaries
from shopping around for an individual trustee willing
to “bend the rules” in ways you did not
intend, or someone who is simply not qualified to act.
Unlike individuals, a corporate trustee is subject to
State oversight for compliance with fiduciary rules
and obligations (your local law or accounting firm cannot
act as a corporate trustee unless specifically
empowered and licensed by the State to perform fiduciary
services).
In
selecting a trustee, your attorney can provide helpful
guidance. If you decide to use a family member as trustee,
play it safe and ask your lawyer where you will be able
to find the support services.
Jack
Davidson, NHTC Board Member
I still encounter lawyers who take the position that
if the surviving spouse acts as the sole trustee of
the Bypass Trust, the estate tax savings feature will
be lost. The code and regs do not support this position
if the principal invasion clause is limited by "ascertainable
standards". See Standards.
However,
it is critically important that the draftsman stays
within the tight confines that have been established.
See Ascertainable
.
Some
lawyers feel strongly that allowing the spousal trustee
to operate within the safety of "ascertainable
standards" will still expose the trust to taxation
in the surviving spouse's estate, if he or she exceeds
the standards. This is a legitimate concern and supports
the thesis of this article.
Comments
about this article? Please email Jack
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