In the majority of cases, the purpose of a trust is the preservation of assets for future generations. In plain English, trusts are often vehicles intended to help take care of the trustor’s (ok I cheated, this word is pure legalese) children. As such, when it comes time to choose a trustee who’s tasked with ensuring that the vehicle functions properly, most clients gravitate towards those they trust the most—family.
Unfortunately, this instinct, though it seems logical on its face, is often incorrect. Often a non-family trustee is the superior option and can help sidestep certain notable pitfalls of including family in trust administration. An interesting recent blog post lays out 3 major reasons why clients may want to choose a non-family trustee:
- Time Consuming. You’ll notice I used the term “trusts administration” above, and that’s on purpose, as it’s the rare description of duty that’s extremely apt on its face. A trusteeship is, at its heart, an administrative position. A trustee is required to maintain detailed records on the trust’s business, keep track of deadlines, maintain accounting reports and stay on top of and comply with ever-changing laws. That’s all on top of his responsibility to keep the various beneficiaries informed as to the trust’s status. Finally, he isn’t allowed to complete these tasks in the way he deems best, but must follow rules laid out in the document itself and abide by numerous, occasionally conflicting legal duties. All in all, it’s a heavy weight to lay on someone and may represent too much of a time commitment for even a trusted family member.
- Liability. The time commitment isn’t the only burden taken on by a trustee. He’s also a fiduciary who’s legally liable for the proper management of the trust’s assets. This position opens up the possibility that beneficiaries may personally sue the trustee for any perceived mismanagement (which can even occur in cases where the trustee has followed professional advice). Having a family member, particularly a non-professional, to assume such risk can be irresponsible for all parties involved.
- Family Conflict. The elephant in the room when it comes to families and money. A trustee can be placed in some fairly awkward positions that can cause or exacerbate all manner of intra-family tension. Questions of favoritism, nepotism or even undue influence can create flashpoints that will disrupt the administration of a trust. A third party trustee will still have to deal with many of these issues, but he’ll have the luxury of doing so with a clean slate and not bringing any emotional baggage/history of his own along for the ride.
In certain situations, a family trustee can work out just fine. However, responsible advisors should alert their clients to the potential pitfalls of involving family and the benefits that a non-family trustee can provide.