When you create a trust, selection of the Trustee should be as important as the language contained in the trust. While some Founders select corporate Trustees, especially with large complex trusts, most select a family member. Selecting the wrong person can create chaos at best and harm the beneficiary’s interests at worst. There are three attributes you should be seeking.
The Trustee needs to be Honest and Trustworthy and able to execute a Fiduciary Duty to the beneficiary. Is the candidate able to put others interests above their own?
The Trustee must be Willing to assume the role. For most, that is an honest appraisal of the time commitment to the job which includes overseeing management of assets, ongoing legal and tax responsibilities as well as requirements of providing any benefits to the beneficiaries. The candidate should also consider the potential of the long term time frame of many trusts – often decades.
The Trustee must be Able to do the job. Does the candidate have any background in law, taxation, finance or experience in general business? Do they have the right temperament? Can they stand up to pressure from competing and often conflicted interests when they don’t represent the best interests or objective of the trust?
They say experience is the best teacher. Recently I observed an example of the wrong person having been selected as Trustee. It involved a person who died and left some of their assets to a testamentary trust which was established for an adult child who was legally disabled and received some forms of public assistance. Because the Trustee and Beneficiary lived in a different state than the Grantor (the person who died), it was suggested to the Trustee to meet with an attorney in that state to determine what limitations on assets and income applied to the beneficiary in order to maintain benefits, such as Medicaid. In other words the Trustee could purchase a car for the beneficiary but there would be a limit on its value before risking benefits being cut off. The Trustee needed to know what that limit was.
The Trustee ended up being convinced by a lawyer to have a new trust drafted with all of the latest clauses and language. This at a cost of almost 10% of the assets that were going to go into the new trust. It turns out the Trustee found this lawyer because the lawyer has a close relative with the same disability as one of the Trustee’s children. In the mind of the Trustee, this gave the lawyer a high level of credibility. Suggestions that the Trustee ask the lawyer if they could provide examples where lack of new language in a trust led to disqualification for benefits in a similar situation fell on deaf ears.
In hindsight, the Trustee was a poor selection. The Trustee was certainly Honest and Trustworthy and Willing to serve. However, the Trustee was not up to the job. The Trustee had no financial, legal or business background and had even previously filed for personal bankruptcy. When confronted with a lawyer who offered additional services that were not necessary for the beneficiary, the Trustee bit. Now the beneficiary has only 90% of their assets.
The Bottom Line: Put thought into Trustee selection, and do your homework.
–Michael Ross, CFP®