When families and individuals are considering the legacy they’ll leave for their loved ones, trusts are often a key component of protecting their family’s wealth and values for generations. Trusts can have the flexibility to accommodate a variety of family goals, whether those are encouraging positive behavior and development for younger family members, minimizing taxes or providing asset protection from creditors.
As the world navigates the disruptive uncertainty of the coronavirus pandemic, now more than ever, families and individuals are reconsidering the trusts they’ve established to ensure their families’ goals and wealth are positioned to withstand trying times now and operate smoothly in the future.
A trust, however, can’t function effectively without a trustee who’s prepared to take on the responsibilities vital to its longevity and success. As grantors think about choosing an appropriate trustee—whether a family member, friend, corporate trustee, lawyer, accountant or mixture of the above—many factors play into the selection process. Here are some factors you should discuss with your clients who are in the process of picking a trustee.
Knowledge of Investments and Specialized Assets
As it implies, appointing a trustee is a decision built on “trust.” Being faithful to the trust’s terms frequently subjects a trustee to numerous subjective decisions that arise, often related to investment strategy. As such, overseeing a trust requires both a knowledge of financial markets and asset classes, while also accounting for what the trust is set up to accomplish for the beneficiaries. For example, a trust intended to provide current support to an individual may require a more conservative, liquidity-driven strategy to meet the beneficiary’s immediate needs. By contrast, a trust with a multigenerational purpose might have a longer-term growth strategy.
Depending on the nature of the trust a grantor is setting up, another consideration is whether the trustee will need to be knowledgeable about specialized assets, like commercial real estate, or be versed in running a business or safeguarding tangible personal property, such as expensive artwork. Cases in which a trustee doesn’t have this expertise often prompt the need to hire an independent investment manager who’s experienced in administering trusts and is willing to craft an investment portfolio appropriate for the needs of the beneficiaries. Even when these tasks are delegated, a trustee is tasked with maintaining oversight on the direction of the process.
Distributing Assets and Difficult Decisions
Equally as important for a grantor to consider are the potential challenges a trustee might face involving how and when to distribute assets to beneficiaries. These discretionary distributions often call for difficult, delicate choices and must account for a host of factors: a trust’s mission, its assets and income, a history of the account value, the beneficiary’s prior requests and the needs of future beneficiaries. In addition, a trustee must factor in the distribution’s effect on the trust’s overall value, asset allocation and taxes, among other issues.
Similarly, a grantor may also grapple with the personal side of making distributions, particularly for trustees who are related to beneficiaries. Sometimes, distributing money to a beneficiary could put the beneficiary at risk, especially if she struggles with issues like substance abuse, gambling or other addictions. In these scenarios, a trustee has a difficult decision to make, especially when the grantor established the trust with the intention of protecting that beneficiary’s financial future. To avoid placing money in the hands of the beneficiary, a trustee instead might pay a beneficiary’s bills directly.
Although decisions like these may be consistent with a trust’s mission and will ultimately benefit the beneficiary and the family, trustees also risk jeopardizing valued personal relationships. Often because of this, families may choose multiple trustees to serve together so that a trusted family member or friend will have the support of a professional trustee, such as an attorney or accountant with experience in handling trust distributions.
In addition to considering these subjective and complex decisions, grantors should also evaluate the process for the daily administrative responsibilities at the heart of effective management, including: keeping a thorough record of the actions taken by the trustee; clear, accurate, and comprehensive accounting and reporting to beneficiaries; and complying with state and federal tax laws and other regulations. To adhere to the individual state laws governing many aspects of trust administration, a deep knowledge of state law is necessary. Similar to investment strategy and asset distribution, trustees who may not have experience with these rules or accounting measures will often have to hire and oversee outside experts.
Adhering to these regulatory requirements and carrying out these tasks not only underpins appropriate investment strategies and the distribution of assets but also more importantly confirms that the trust is being managed according to the terms established by the grantor and in the best interests of the beneficiaries. Playing a large role in the success of a trust, these administrative tasks and background knowledge shouldn’t be overlooked by grantors.
The ultimate decision of selecting a trustee or trustees depends on multiple factors that account for a family’s wealth and values. Therefore, trustees must understand the decisions they’ll face and possess the knowledge and administrative skills they’ll need to drive a trust’s success. Putting the thought and care into considering these factors when selecting a trustee is an essential step grantors must take to ensure their family goals outlined in the trust are carried out not only in times of crisis but also during periods of growth and stability.