By Harry S. Margolis
I am working with an older couple who is updating their estate plan, which includes continuing trusts for their children and grandchildren. They are trying to choose the trustee or trustees from among their five children and deciding whether to include a professional trustee. Here are seven issues I've asked them to consider in making their decision:
- Temperament. While the clients are certain that they want one of their sons to serve as a trustee, they are also considering their daughter to whom they feel closest. However, she has been described as emotional, confrontational and dogmatic—features in a trustee that should be avoided.
- Cost. Many people fear using a professional trustee—trust companies, banks, attorneys, accountants—due to costs. Professional trustees usually charge between 1.0 and 1.5% of assets under management, with the fee decreasing as the trust funds increase. Over time, these costs can add up, but not nearly as much as the cost of bad management. To put these costs in perspective, they are often the same or less as financial advisors or mutual fund companies charge, and they do not take on any of the fiduciary responsibilities of trustees.
- Number. In my clients' case, they would be comfortable simply naming their son as the sole trustee, but he is nervous about what that might do to his relationship with his siblings. Another trustee would allow him to share decision-making and responsibility (and blame, perhaps), as well as the workload. It would also provide redundancy in the event that one of the trustees became unavailable for any reason. While it makes a lot of sense to have more than one trustee, more than three starts to get cumbersome. While any single trustee can act for the trust in terms of writing checks and directing investments, she must be carrying out the decisions made by all of the trustees. Keeping everyone in the loop and always making joint decisions can be difficult if too many people are involved.
- Stability. Trusts can last a long time. Will the person you appoint be able to provide the necessary attention to the trust for years or perhaps even decades? Will they be able to keep up with the often tedious jobs of paying bills, filing tax returns, and preparing accounts? Since we can't be certain of the answer to this question, when appointing an institution (banks often get bought and sold, sometimes with ill effect on their trust departments), so the trust must include a mechanism for changing trustees.
- Financial acumen. The trustee will need to manage trust investments and spending, taking into consideration the needs and interests of both current and future beneficiaries. We often work with individuals who have recovered large personal injury settlements. Trying to balance their current and future needs can be difficult. They may have $1 million in trust, which can seem like a lot of money, but to make sure that the fund keeps growing with inflation, they need to limit their trust withdrawals to $30,000-$40,000 a year. This may seem incongruous with so much money invested, but otherwise the buying power of the trust will diminish and ultimately, the trust could fall into a "death spiral" as the beneficiary must dip into larger and larger amounts of trust principal to make ends meet.
- Organization. In addition to all of the factors mentioned above, at least one of the trustees needs to be very well-organized in order to meet all of the trustee responsibilities—making distributions, providing account statements to beneficiaries, reviewing investments, and filing timely tax returns.
- Personal touch. While cost is one reason many clients avoid using professional trustees, another is fear of working with an institution, rather than an individual who personally knows the beneficiaries' situations and needs. This can be especially off-putting if the institution has experienced significant turnover in personnel. We've had cases where a parent chose a local banker to serve as trustee, only to have that bank bought by a statewide bank, which was bought by a regional bank which, ultimately, was bought by a national bank. In the end, the adult children had to deal with trust officers in another state. This is another reason it's important for all trusts to have a mechanism for changing trustees.
As you can see, neither the choice of trustee and the chosen person's decision to accept the appointment, should be taken lightly. Each client's decision will be made based on his unique situation, including the available family members and friends, the likely longevity of the trust, the amount of assets under management, and other factors. We find that the combination of a professional trustee who can take care of the administrative side of the trustee's role and a family member who can bring the personal touch often works best.
Margolis & Bloom, LLP, practices estate, long-term care, and special needs planning in Boston, Norwood, and Wellesley with a strong commitment to client service. If you have questions about these or other legal matters, do not hesitate to contact us by calling us at 781-705-6400.