One of the most important aspects in creating a trust is to ensure that the client has selected the appropriate trustee or trustees. Of course, above all, the client must trust the person or persons they are asking to serve in the role. However, in addition to trust there are other factors to consider when choosing a trustee.
In order to remember important material, I would often create mnemonics while studying for the bar exam to become an attorney. As I was thinking about the characteristics that an ideal trustee should possess, a simple, but on-point mnemonic presented itself to me: ACE. I found the term ACE appropriate, because the definition of ace is: “a person who excels in a particular activity.” In this case, when choosing a trustee, the client wants a person who excels at the management of their trust. Let’s look at the characteristics of an ACE trustee – Availability, Cost, and Expertise.
Availability. It is very frustrating to a client, beneficiary, and legal counsel when there is an absent trustee. A few crucial issues come into play in regard to the trustee’s availability – time, distance, and age.
Time – The time commitment of a trustee will vary. This can depend on the assets that the trust holds or the type of trust. For example, a trust that is the owner of a primary residence that the client resides in may need only minimal oversight during the client’s lifetime. However, a trust with a large portfolio invested in different securities may require constant review. Although a client may have a child who has the financial acumen to serve as a trustee, if the child does not have the time to manage the trust, his or her skill will provide little value. It is important to discuss with your financial advisor and attorney how time intensive the trustee’s role may be in your particular situation. If a client’s proposed family member trustee is a busy professional or starting a family, the trust understandably may not be that person’s priority, and the trust could suffer accordingly.
Distance – In today’s digital age distance is less of a concern than in the past, but still a factor to take into consideration. This is particularly important if a client’s proposed trustee spends significant time outside of the country. Trust management requires original signatures, and often notarization and medallion signature guarantees. Having a trusted friend who lives halfway across the globe serving in the trustee role will inevitably cause delays in the workings of the trust, primarily in the distribution and settlement phases. Importantly, these delays can cost money and cause discord among the beneficiaries.
Age and Health – While no one has a crystal ball to determine what age a trustee will live to, a client should be honest about the age and health of the trustee they are thinking of appointing. For example, a trusted sibling may have more experience or time than a child, but the likelihood of that client’s sibling passing before or around the same time as the client is high. The term of a trust varies based on the goals of the trust. An attorney should always discuss with a client how long their trust will be in existence for and what will trigger its termination. A trust that will continue for generations will need a trustee or successor trustee that will be around for a long time, such as a financial institution. For a trust that has a shorter term, a younger family member may meet the requirement.
Importantly though, if the client weighs their options for trustee, and still finds their sibling to be the best option, this does not mean the sibling should not be named. A successor trustee to take over when the original trustee is unable or unwilling to serve must be thoughtfully chosen in every situation. In this particular scenario, the client could name their sibling, along with a successor trustee, to step in if the sibling is unable to act. Or, the client could name two trustees for a smoother transition when one trustee was unable to serve. A trust should also have a method for the appointment of new trustees if all the trustees named are unable to serve.
Cost. The cost of a trustee depends on who will serve in the role. A client should find a trustee that is cost effective in relation to their circumstance. A family member will usually serve as a trustee at little to no cost. A professional trustee, such as a trust company or bank, will charge a fee that varies from institution to institution. Many professional trustee fees are based on a percentage of the assets under the trustee’s management. For example, one percent or one and a half percent of the assets managed. However, these costs in some cases are equal to or less than what a financial advisor would charge to manage an account, and a financial advisor does not take on all of the responsibilities of a professional trustee. If the trust holds investment assets, a professional trustee’s fee may be insignificant in comparison to the value received for their specialized experience in investing and managing.
Expertise. The client has worked hard to earn the assets that they are using to fund their trust. Therefore, the person or persons they are choosing as trustee should have enough experience and knowledge to manage the trust assets appropriately. Expertise for a trustee can be broken down into two categories. The first is financial acumen, but the second just as important part of experience, is having good judgment.
Financial Acumen – The level of financial sophistication of a trustee should depend on the assets the trust owns. In most circumstances, a trustee need not be a financial professional or an expert in the field. However, a trustee should have at minimum a basic knowledge of financial workings. If a client is closest to their daughter, but she is poor at managing her own money, it would not be in the client’s best interest to give their daughter the trust money to manage and expect a different outcome.
Good Judgment – A trustee must answer to many people while serving in their role. The trustee needs to communicate and take into consideration the client and all beneficiaries. If the proposed trustee does not have the temperament to handle requests and concerns that the client and beneficiaries may have, this is a recipe for disaster. An overly emotional or confrontational child may not be the best person to manage the interests of those affected by the trust. Also, a trustee needs to have the self-awareness to ask for help when they are not sure of what to do. A know-it-all trustee that will not ask for the advice of an attorney, accountant, or financial professional when they are in over their head can put a trust at risk.
There are many aspects to take into consideration when choosing trustees. Each client’s situation and trust is different. It is important that both the client and the family understand the role and responsibility of their trustee. Clients who are thoughtful and honest in making a choice can breathe easy knowing that they have an ACE up their sleeve.