by Thomas D. Begley, Jr., CELA
Attorneys prepare many types of trusts. The trusts are for multiple purposes. They include special needs trusts, standard support trusts, discretionary support trusts, disclaimer trusts, bloodline trusts, incentive-based trusts, retirement plan trusts, and trusts for Medicaid planning purposes. Occasionally, it is appropriate to have a family member serve as trustee. However, in most cases it is better to retain the services of a professional trustee. Ten reasons to employ professional trustees include the following:
- Target on Individual Trustee’s Back. If something goes wrong, such as the trust (1) makes improper distributions, (2) pays unnecessary taxes, (3) causes the beneficiary to lose public benefits, (4) is not in compliance with the instructions given by the grantor, or (5) the investment performance in the trust is poor, the trustee can be held responsible.
- Knowledge of the Law. A trustee must have a knowledge of income, gift, estate and generation-skipping taxes, including capital gains taxes. A trustee must also understand accountings and prepare them when required. Trustees must also be aware of changes in the law.
- Investment Expertise. Good professional trustees have investment expertise, which is usually far superior to that of the proposed family member trustee.
- Avoidance of Family Friction. One of the reasons that parents establish trusts for their children is to protect the children from themselves. If a brother is named as trustee for his sister’s trust and the sister wants money, the brother’s job is to say no if the request is inappropriate. This naturally causes friction among family members. Most parents want their children to life harmoniously, and appointment of a family member as trustee for another family member is an almost certain recipe to engender family discord.
- Special Circumstances. Unfortunately, many beneficiaries of trusts suffer from drug or alcohol problems or are spendthrifts or can’t hold a job. The trust document may contain restrictions on distributions to these beneficiaries. Professional trustees are much more apt to understand these restrictions and have the courage to say no when a beneficiary suffering from one of these conditions requests a distribution that the grantor did not intend.
- Special Needs Trusts. A family member should NEVER serve as trustee of a special needs trust. These trusts are extremely complex, laws change frequently, and failure to comply with all rules and regulations can result not only in a loss of future benefits for the trust beneficiary, but also a requirement for repayment of past benefits received when the trust was out of compliance. Trustees can be surcharged.
- Timely Administration. Corporate trustee are also much more likely to administer the terms in the trust in a timely manner. Family members often are busy in their own lives and don’t have the time to study the trust document, understand the trust goals, understand all of the family dynamics, and fully understand the duties of the trustee.
- Trust Protector. A trust protector, usually a family member, can be appointed in the trust document who is given the power to remove and replace the trustee with another corporate trustee.
- Many individuals are reluctant to appoint a corporate trustee for fear of the fees that will be charged. Most corporate trustees charge between 1% and 2.5% of the trust assets with a minimum fee. The minimum fees often are a reason not to use a corporate trustee for small trusts. However, it must be understood that a family member can also charge trustee fees. If the family member has the good sense to invest the money with an investment manager, the investment manager will charge fees. Usually, the superior investment performance of the professional trustee will cover all, if not most, of the trustee’s fee. There’s an old saying, “You get what you pay for.”
In conclusion, in most trusts of significant size a professional trustee should be considered. In almost all cases, performance is better, fees are reasonable, and the ability to have a family member remove and replace the trustee gives the family establishing the trust a certain feeling of comfort.