Choosing a Trustee is More Than Just Finding Someone You Can Trust

You’ve worked hard to create your family trust. You hired a good attorney, funded the trust with your most important assets, and even carefully structured an investment portfolio to consider current and future beneficiaries’ needs. But now who is going to run it?

It may be tempting to rely on a trusted family member or friend, but there are several considerations that could make this option less appealing. You may find that it makes more sense to use a corporate trustee, either now or after you pass, to ensure a harmonious transfer of assets.

Choosing a trustee can be simple, but disastrous

Many people name a trusted family member or friend as trustee of their assets to carry out their wishes after death. It seems the natural choice. After all, family members and friends generally want to be helpful and may have expressed their willingness to take on this sacred duty for you. And in many cases, it probably works out well, particularly if the assets are liquid and the portfolio is small.

You probably created your trust with privacy considerations in mind. A family member or friend can keep your trust details private—especially sensitive family information like how to deal with an addicted child. And this person would likely cost a lot less than a lawyer. So a clearly worded trust that distributes all assets right away probably lets an unskilled trustee make relatively quick work of your instructions and move on.

But not all trusts are simple, not all portfolios are small, and not all family members are likely to handle an inheritance without foolish choices or infighting. A short discussion will highlight several risks you might face by relying on a known trustee.

Trusts can be complicated…even if they aren’t

Trustees must handle proper administration of trust terms, oversee investments, hire and fire legal and investment professionals, prepare tax returns, and stand in a position of personal liabilityfor decisions they make on the trust’s behalf. If a trust is complex, not only are all the above complications true, but a trust’s life can extend over several years if there are provisions restricting the distribution of assets or hard-to-sell holdings.

If you went to your closest friend or family member and said, “I’d like you to take on a volunteer job that involves significant complexity which may extend beyond your current competence, may involve emotional drama, and will likely use up many hours of your time over a period of years…. Oh! And you can get sued if you mess up,” how many would jump at the chance? Contrary to popular trust beneficiary opinion, trustees also have their own lives to live.

Trustworthiness does not equal competence

Say you have a best buddy from college who has been by your side through thick and thin. This guy (or gal) would do anything for you. But math and detail orientation were never a strong suit. Not a good choice for trustee. Would you like to risk your loyal best friend getting in trouble with the IRS for an incorrectly filed trust tax return, sued by the beneficiaries for mismanagement, or duped by an unscrupulous financial professional?

Competence counts. And any money you saved on trustee costs might eventually go toward hiring expensive professionals to do all the work for that trustee once it becomes clear that the trustee lacks the skills necessary for successful oversight.

Family members are funny when it comes to inheritances

Even in a family where everyone gets along relatively well, disagreements arise. When money is involved, it’s like pouring gas on a fire. For some reason siblings get jealous of each other if they perceive the slightest unfairness in how assets get distributed. When a family member oversees the distributions, concerns about impartiality can surface. People also can become “back seat drivers,” telling the trustee what to do instead of taking instructions from him or her.

No one wants to leave their heirs with a fight or put the trustee in a situation of having to field accusations or possible legal action. In addition, the trustee who is a family member may actually have affinities which interfere with a completely impartial distribution policy.

People don’t live forever

Finally, what if you select a family member who is a former CPA and above reproach in financial matters, but who is 75 years old when you die? Can that person realistically oversee a complex estate for many quarters? Unforeseen health issues or age-related fatigue can derail even the most competent trustees. You need to monitor your trustee’s ability to fulfil the terms of your trust in light of their future age and career status.

The above discussion is meant to highlight many risks you face by “keeping it in the family” when it comes to choosing a trustee. For a detailed list of considerations about what kind of trustee you want, there is an excellent article called “How to Choose the Right Trustee for Your Estate” on the Kiplinger website. We have drawn from its recommendations for the next part.

When a professional trustee makes sense

Using a professional trustee makes sense in all the above situations, of course. For one thing, a professional trustee is generally an organization with competence and a legal fiduciary duty to carry out the terms of your trust impartially. Yes, there is a cost involved, but it can be well worth it. (See the conclusion for one possible way to reduce overall costs.)

What kind of companies serve as professional trustees?

You can hire just about anyone to be a trustee, but typically it will be an attorney, a CPA, or a professional trust company (including a bank with a trust department). Attorneys can become very expensive very quickly and are best used only judiciously when you need actual legal advice or documents. CPAs may not have a great deal of experience with asset management and also tend to be expensive in their own right. That is why we think your best choice is a professional trust company.

A trust company is legally required to serve as your fiduciary and to put the interests of your trust beneficiaries first. Because the trust company is a third party, it can remain impartial relative to the beneficiaries and not be unduly swayed by a powerful family member. It can also provide a natural succession of trust officers, as it is a corporation and not an individual who can retire or die.

Trust companies have deep experience managing all aspects of trusts and also have networks of attorneys, CPAs, investment managers—even life coaches to whom they can refer you if you lack good resources for managing your trust. A trust company can also oversee and hire/fire a financial advisor as well as retain the same financial advisor after your death that you were using during your lifetime.

Note that you don’t want to hire your independent financial advisor to be your trustee, because fiduciary advisors who have access to control asset distributions must undergo an annual firm custody audit, and that is likely an expense a small advisor won’t want to take on. Plus, there are many examples of unscrupulous advisors taking advantage of their position of trust to embezzle funds.

We strongly believe that your advisor should work on a fee basis and only direct your investments or provide financial advice, not control distributions. That way you maintain an important check and balance.

If you don’t feel comfortable turning over management of your private trust to a third-party company, you can also make them a “co-trustee,” sharing duties with a trusted person who oversees the relationship but doesn’t have to get involved with the day-to-day work. Or you can simply place a provision in your will that appoints the trust company as “successor trustee,” meaning they become the trustee only after your or the current trustee’s death. An added benefit of this approach is that the trust company won’t be charging you for its services until it actually takes over.

Which trust company should you use?

Bank trust companies abound. We caution you about hiring a company that also has its own investment products because it is likely the company will recommend its own investment products for your trust, and these investments could be suboptimal as well as represent a conflict of interest. The largest trust companies also may not offer much personalized service to smaller trusts.

Trust companies exist which clearly separate trust and investment management divisions. There are also trust companies that have no asset management operations at all but purely focus on the trust administration. Alpha Fiduciary has at least one such relationship, and we feel this best aligns all parties’ interests with your own.

Alpha Fiduciary will operate as an independent fiduciary financial advisor hired by the trustee to manage your trust assets in line with your trust’s goals. Please give us a call to talk about your specific situation, and we can recommend a trust company for you.

How do you save money on trustee fees?

Finally, using a professional trustee has a cost. It’s usually a small percentage of the assets in the trust, and some companies are more expensive than others. The companies we work with at Alpha Fiduciary both have competitive fee schedules as well as potential South Dakota domicile so that you can have a South Dakota trust situs. If you haven’t already read about South Dakota trusts, please click here.

You may be able to realize an overall cost savings by using a South Dakota trust, even though you have to pay trustee fees for the service. Gains in South Dakota trusts do not pay current income tax at the state level. Careful analysis of expected returns and the size of trust assets would help determine whether using a South Dakota trust would reduce your overall costs. Let us know if you would like us to help you perform this analysis.

In conclusion, using a family member or friend to run your trust is simple, inexpensive (at least on the surface), and easy to do. But it comes fraught problems. We think using a professional trustee makes more sense for the reasons above. Why not give us a call today to discuss your specific situation?

About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.

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About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.