Jen Proper, managing director of wealth strategies for Pitcairn, discusses the issues families should consider when naming trustees for their trusts.
What characteristics should families look for when choosing trustees?
When I was just out of law school, I worked with someone who said the most important thing when you open up a trust document was to go to the trustee section and see who’s actually in charge of distributing the money — who is making the decisions on the behalf of the trust.
Choosing trustees can take a bit of time and thought. First, families need to make sure the trustee is someone that they feel is reasonably likely to understand those obligations and the duty that comes with being a trustee. The person needs to understand all the pros and cons of acting as a trustee before they’re named in the document.
They also should be able to deal with conflict. There may be times when a beneficiary asks for a distribution and the trustee has to say no, and there could be some resentment. There will be some black and white language in the trust documents that says they can make distributions for certain reasons. But as with anything, there’s always a bit of a gray area.
Is it ever a good idea to name a family friend as a trustee?
I don’t usually suggest naming a trustee that is a friend because of the point I mentioned in my previous answer about how a trustee must have the ability and confidence to say no. It should be someone who understands what being a trustee is, which is to act as a fiduciary. They can’t just willy-nilly hand out a lot of money to G2, let’s say, for a fancy sports car or something that’s not within the dictates of the trust structure. As a fiduciary, you are held to a higher standard and must legally and ethically act in the best interest of the beneficiaries. This comes with potential legal risk if a trustee does not act in a prudent manner. Beneficiaries have the right to bring litigation if a trustee has violated the terms of the trust or harmed them in any way.
What should families consider if they are thinking about naming a family member as trustee?
Think through the family dynamics. In some cases, it works perfectly to have, say, one sister be the trustee of another sister’s trust. But in some other cases, maybe that’s not the best choice.
What about naming the trust beneficiary as a co-trustee?
You have to be careful about naming a beneficiary as trustee, particularly as sole trustee, for estate tax reasons. But being a co-trustee can provide a beneficiary with insight into how the trust works and a little more skin in the game, if you will, as far as thinking through the investments or the distributions.
How do you handle succession for trustees?
You have to think about a succession plan for the trustees. It might be easy to think about who you would name today. But what about in 30, 40 or even 100 years?
Sometimes that’s where it becomes a conversation about a corporate trustee instead of an individual. Our clients’ first thought usually is: ‘We don’t want our grandchild to have to say to some nameless person at a bank, ‘You know. I need money from this trust.’ That’s not our intention. We like the fact that we have a trust to protect the wealth from creditors, but we don’t want them to feel awkward.’
That does get a little bit harder. But any individual trustee will, especially with a dynastic trust, eventually age out of the position. It can also happen that 30 years ago, when the trust was created, the trustee was a great fit. But now, maybe not as much so. This is an ongoing conversation — and it’s an important one.
