One of the most daunting decisions for an estate planner is determining the ideal candidate to serve as a trustee for a client. A trustee holds a pivotal role in executing the estate plan and ensuring the smooth functioning of any trust. They bear the responsibility of managing assets, handling administrative and executive duties, and acting as a trusted advisor and counselor to the family. A trustee must possess a deep understanding of the client’s personal and familial affairs, as well as expertise in investment and business management, taxes, and administration. Above all, they must display empathy when interacting with the client and their family.
For ultra-wealthy families, establishing a private trust company has long been an option. This single-family office functions as an institutional trustee, incorporating individual family members, friends, business associates, and professional advisors on its board or committees. While a private trust company has the potential to expand its services to other families, it risks veering into the realm of institutional trusteeship, where ownership and control may be compromised if the price is right.
Individual Trustees
There are typically three types of individuals considered for the role of trustee: a family member, a friend or business associate of the client, or a professional advisor.
Opting for a family member as a trustee is often appealing to clients. They possess knowledge of personal and family matters, show empathy, and have a personal stake in the Trust. Additionally, they are usually well-equipped to handle various responsibilities and demonstrate common sense. However, family members, particularly from younger generations, may struggle when faced with difficult decisions, especially if a trust beneficiary is experiencing mental or physical decline. They may also lack experience in managing business or real estate interests, be unfamiliar with trust administration, and exhibit biases towards certain family members, potentially leading to favoritism or discrimination.
Choosing a friend or business associate as a trustee offers the advantage of personal familiarity with the family and their financial affairs. These individuals often share a common understanding of the reasons behind the establishment of the Trust. Clients can typically assess their friend or associate’s work ethic and integrity. However, there is also the risk that they might be tempted to take speculative actions with trust assets or show favoritism towards certain family members. Additionally, if the friend or associate is of the same generation as the client, they may not outlive the client or be able to effectively manage the Trust due to age or illness. Moreover, their personal commitments to their own businesses, investments, and families might leave them with limited time to devote to proper trust administration.
Both family members and friends or business associates have one common drawback: there is no guaranteed recourse for collecting damages if they are responsible for any losses suffered by the Trust or family due to negligence or misconduct.
Alternatively, appointing a trusted professional advisor as trustee presents another option. These individuals have established long-term relationships with the client and possess extensive knowledge of their personal, family, business, and investment matters. Over time, they have demonstrated their honesty, diligence, and expertise in trust management. However, professional advisors may still be susceptible to the temptation of speculative activities or misappropriation of assets, or they may err on the side of caution, potentially deviating from the client’s wishes. Additionally, since they are mortal, they may face aging, illness, or death before the Trust term concludes. Furthermore, an inherent conflict of interest arises due to their duty as a trustee conflicting with their need to charge professional fees at an hourly rate, which may be excessive for trust management. A professional advisor might mistakenly believe they can handle all aspects of trust management without seeking the specialized skills and expert advice required for certain asset management tasks outside their professional expertise.
Institutional Trustees
As an institution, a bank or trust company can serve as a trustee, boasting a team of experienced professionals well-versed in trust asset administration and investment. With their perpetual existence, they are not reliant on any one individual’s lifespan or capabilities. Their primary objective is to provide impartial guidance. Moreover, they are subject to regulation at both the state and federal levels and have established records of effective administration and investment management. However, their institutional nature can also pose challenges. They often lack knowledge about the client’s personal, business, or investment matters. Decision-making occurs through a slow and sometimes bewildering committee process, with minimal input or consensus from the family.
Despite being an institution, they are not immune to change. Banks and trust companies frequently experience significant turnover among their staff, making it difficult to reach a reliable contact. Additionally, these institutions may be acquired by other entities offering irresistible deals to their shareholders. Consequently, administration and investment management may be consolidated elsewhere, contrary to the client and family’s expectations. The primary goal of these consolidated companies is to minimize risk exposure, potentially putting assets like a family business, a vacation home, or farmland at greater risk.
The Challenge of the Fiduciary Standard in Entrepreneurial Families
Both individual and institutional trustees face a common challenge: adhering to the fiduciary standard. This standard demands trustees to avoid speculative investments and apply proven and conservative policies in trust administration. However, this approach often clashes with the entrepreneurial drive of clients, particularly when they are successful business founders seeking to foster the same spirit in the next generation. As custodian of the client’s entrepreneurial legacy, the Trust can establish a transcendent fiduciary standard that nurtures innovation and creativity. This approach relies on a profound comprehension of the client’s intentions and an empathetic understanding of the client and family members when administering the Trust to the highest standards. The cooperative aims to achieve what the client envisioned when forming the Trust.
The Trust Protector
A Trust Protector is an individual appointed in a trust document to fulfill specific purposes that are not already assigned to the Trust’s creator (settlor), trustee, or beneficiaries. Initially, this role was designed to serve as a safeguard for foreign trustees of offshore trusts. However, it has evolved to address unforeseen challenges that may arise during the administration of a trust.
The powers bestowed upon a Trust Protector range from administrative to substantive. Administrative powers include the authority to remove and appoint a successor trustee, give consent to or veto a trustee’s actions, amend a trust document to take advantage of new tax laws, review and approve accountings, and relocate the primary place of trust administration.
Trust Protectors are particularly useful in situations involving legal or family disputes, providing oversight and conflict resolution, especially when a trustee is also a beneficiary of the Trust. However, it is important to note that there is no universally accepted definition of what a Trust Protector does, nor is there consistency in how the courts have handled Trust Protectors.
Conclusion
When it comes to choosing between an individual trustee, an institutional trustee, and a Trust Protector, the optimal approach is to use all three. By delegating specific duties and responsibilities to individuals and institutions, such as administration, investments, distributions, and general services, clients can ensure that they have access to the necessary expertise, experience, knowledge, and empathy required for each task. The key to success in employing multiple trustees lies in their collaborative efforts to serve the best interests of the client and the family, while aligning with the client’s intentions. However, this collaboration can only be effective if there is a cooperative structure in place to ensure harmonious teamwork among all trustees, as they work together and in accordance with the client’s wishes.
Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.