In Whom Do You Trust?
Worth Magazine, June-July 2013
Choosing a trustee requires a delicate balance between kinship and expertise. Here’s how to do it right.
The issue usually arises in the context of testamentary trusts—those established under the provisions of a will—or life insurance trusts funded upon death of the settlor (the person who established the trust). The settlor/client has to select successor trustees, who will assume the client’s role as trustee after the client dies. But the problem also comes up when the client is choosing trustees for an irrevocable trust funded during the client’s lifetime.
I recently fought a losing battle with a client over the selection of trustees for a “dynasty trust,” which can continue for generations without being forced by state law to terminate. The client insisted on only appointing family members and close friends, none of whom, in my judgment, had the professional experience to manage a trust containing nearly a billion dollars of corpus (property transferred to the trust).
I suggested a board composed of people with whom the client was close as well as people with the requite business and financial experience. Some trust jurisdictions even permit different trustees to have different responsibilities; for example, one trustee may be designated to handle investments while another interacts with the beneficiaries and approves trust distributions. The client rejected my suggestions.
Another client once asked me whether he could guaranty that, after his death, his selected trustees would act in a particular manner with respect to his particularly spoiled adult children. I told him that the only thing he could guaranty was that he would never know.
Almost all settlors fear the loss of control that’s inevitable when delegating such important decisions. That anxiety can be mitigated by trust language directing the trustees as to the settlor’s wishes, or through a less formal “Letter of Wishes.” Unfortunately, these approaches may unduly tie the trustees’ hands and prove counterproductive. And in any case, you can’t draft clauses for every contingency, and so it always comes back to selecting good people.
While being asked to serve as someone’s trustee may initially feel like an honor, the role often involves a great deal of work with little or no compensation and the risk of legal exposure. So settlors must choose someone who understands these considerations and is willing to do it anyway—not someone who will resign as a trustee as soon as he is faced with the first complication. The other alternative is to appoint professional trustees for some or all of the avail-able slots. These experts have the training and knowledge necessary to serve, are usually licensed by some regulatory body, like a state bar association, and also generally carry malpractice insurance. A lay trustee can also hire professionals such as lawyers, accountants and financial advisors to assist in meeting various fiduciary obligations. They can be paid either from the trustee’s fee or, if the trust document permits, from the trust.
Sometimes, in order to attract people willing to serve as trustees, the trust document needs to provide “hold harmless” and indemnity clauses protecting the trustees against personal li-ability. While these provisions insulate trustees from many types of exposures, they do not exculpate trustees from all risks associated with their acts or omissions, and the extent to which these provisions are protective vary by state. (Also, as a general matter, trustees cannot insure themselves from acts of self-dealing and those involving bad faith.) Selecting trustees is complicated. But if you care about your posthumous wishes being respected and beneficiaries treated well, it’s essential to do it right.