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Should
a Family Member Serve as Trustee?
One
of my responsibilities at the Trust Company of Vermont is
risk management. It's my job to make sure we comply 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
in a trust company made up of 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 Vermont 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 such a 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
Links
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 lawyer 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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