Your family’s wealth plan almost certainly includes trusts. Whether establishing a new trust, modifying an existing trust, or dealing with a transition of the incumbent trustee, selecting the person or institution who will act as your trustee is one of the most important decisions you and your family members will make.
So what are your options?
The legal qualifications for a trustee are simple: he/she must be over the age of 18 and legally competent to manage his/her own affairs. The practical qualifications, however, are much more complicated. Most importantly, a trustee must have the skill set to properly administer the trust and meet the needs of the beneficiaries and must possess and exercise good judgment. Does the trustee truly understand the duties and responsibilities of a trustee and how to administer the trust and apply best practices? If not, will the individual recognize what he or she does not know and seek out and follow that advice? In addition, because a trusteeship often is a long-term commitment, you may need someone who will be available for a long period of time. Finally, serving as a trustee can be time consuming and you will need to ensure that your choice has the time and is committed to serve the needs of the beneficiary.
With these things in mind, you have several places to look to find the best person to carry out your wishes:
- Family Members
- Business Associates
- Professional Advisors
- Family Trust Companies
Should I Choose a Family Member?
Choosing a relative as your trustee can offer several advantages. He or she would likely:
- Share your values and understand the family legacy and any family businesses.
- Be able to keep in mind the settlor’s objectives in creating the trust.
- Understand the family dynamics to help navigate emotional issues and stay focused on achieving the settlor’s and family’s goals.
Plus, they usually work cheap!
That being said, choosing a family member has its drawbacks. A relative may:
- Lack the fiduciary experience and skills to effectively administer the trust and to carry out the settlor’s objectives.
- Lack the time to properly administer the trust.
- Have difficulty saying “no” to requests from other family members regarding investment opportunities, loan requests, and distribution requests, especially when saying “no” could harm those relationships.
- Have conflicts of interest.
Choosing a family member can also cause or exacerbate bad feelings among family members:
- A trustee’s power and control over your assets and to make distributions can cause resentment among beneficiaries.
- Hurt feelings may develop in those not chosen, who may feel dismissed or feel that the settlor believes them to be unworthy of trust and respect.
- Strife could develop if the family member fails to effectively manage the trust.
- Choosing an in-law as trustee could become problematic in the event of a divorce.
What If I Choose a Friend or Business Associate?
A friend or business associate may not have some of the objectivity issues associated with family members serving as trustee, while still ensuring that the trustee is someone with insight into the family, its values, its business, and its affairs. Friends or business associates also can be a good choice because:
- It is easier for someone outside the family to say “no” to requests that should be refused.
- He/she would not have the emotional baggage of a family member.
- The trustee can make sound decisions knowing he/she will not suffer the family repercussions that could occur from an unpopular decision.
And, like family members, they may also agree to work cheap!
Of course, like any choice of trustee, friends and business associates can have their downsides:
- They may lack the experience and skills to properly administer the trust.
- They may lack time to fulfill their duties to the extent the needs of the beneficiaries require.
- Objectivity and saying “no” could still be a problem.
- This person could still be affected by repercussions from resentment and hurt feelings among family members if the friendship is close enough.
Should I Choose an Institution Instead?
Selecting an institution to serve as trustee may not present the problems caused when a family member, friend or business associate is selected as a trustee, because institutional trustees:
- Have the skills and experience, along with the resources and systems, to effectively administer the trust in accordance with the settlor’s wishes.
- Can be objective and impartial, having no familial conflicts of interest.
- Can more easily say “no” to requests that should be declined.
- Continue in business for decades so the family will not have to choose a successor down the road when an individual trustee dies or becomes incapacitated.
- Have insurance to cover a mistake, so it can be easier to recover damages for ineffective management or mismanagement of the trust assets.
Sound ideal? Keep in mind that an institution also can be bureaucratic in its approach, so:
- Recognize they are not always fast-moving machines and that decision-making can take time.
- They may be more conservative than your family would like.
- In addition to being conservative, institutional trustees can be very uncomfortable with holding concentrated positions in family controlled enterprises and in private equity investments.
- Be cognizant that trust officers will be less familiar than others might be with your family’s circumstances and values.
Institutions have some other disadvantages you might not face with other choices:
- Trust officers sometimes move to other positions within their organization or to entirely different institutions, and their replacements will need to be “re-educated” about the family and each trust when turnover occurs.
- Institutions might be acquired, and the character of the institution may evolve and result in a different institution acting as your trustee than the one selected.
Is a Professional Advisor a Better Choice for Me?
A professional advisor can embody the best of friends and institutions, as he/she:
- May be more likely than family or friends to have experience, skills, and systems and procedures to administer a trust (although that is not guaranteed).
- May also know the family and be well-acquainted with the settlor’s intent and goals for the trust.
- May be objective and may be trusted by the beneficiaries.
- Will enhance family privacy by limiting the number of individuals with involvement in the family’s affairs.
However, not every advisor is suitable to serve:
- Some trusted individuals may nevertheless lack expertise or resources to serve as a fiduciary.
- Some firms prohibit individuals associated with the organization from serving as a fiduciary, as conflicts of interest could arise between an advisor’s roles as a fiduciary and an investment professional.
- Not all family members may trust or respect the advisor, and his/her power over the trust assets may cause nervousness or resentment in the family.
And like family members, friends, and business associates, an advisor will eventually die, may become sick or incapacitated, or may retire, thereby necessitating the appointment of successors.
What About Using a Private Family Company (PFTC)?
Ultra-high net worth families are increasingly using a private family trust company to make available to the family the best of the various other alternatives, while also avoiding their downsides. Some of the advantages of a PFTC include:
- Institutional continuity, because PFTC’s do not die, become incapacitated, or retire.
- A PFTC is likely to be staffed with individuals who are devoted to the family and understand the family’s goals and objectives and its values.
- PFTC’s may be more willing and comfortable with holding interests in family companies and other private equity investments.
- The PFTC can offer opportunities for family members to provide input and influence in the governance process through their participation in PFTC committees that manage investment, distribution, and administration functions.
- PFTC’s are able to staff themselves with expertise in administering trusts or to outsource trust administration services to someone with the necessary skills.
- PFTC’s consolidate the family’s information and affairs in a family controlled entity, thereby enhancing family privacy.
- PFTC’s may be formed in a state with favorable tax laws, which may provide a tax benefit.
Of course, PFTC’s are not right for everyone. These are relatively new and untested vehicles.
- PFTCs require significant upfront investment in their creation, including the capital that must be committed and the time and money working with skilled professional advisors to form the PFTC and develop the policies and procedures required to properly and successfully administer trusts.
- Only a handful of states currently permit private family trust companies, so the family may need to form it in another state and administer at least some functions outside the family’s home state.
- Existing trusts may need to be modified in order for them to be administered by a PFTC in a different state.
Choosing a trustee is an important decision, and your advisors should be a great help as you consider the pros and cons of each of these options on your particular situation. With some thoughtful consideration, you can choose the trustee that best meets your needs.