Estate planning is essential for people who have accumulated meaningful wealth or face challenging family circumstances. Like math, estate planning can be hard, especially so when clients need to decide who should drive their estate-planning bus. Disaster can ensue if this decision is taken lightly. Often, discussions of this topic focus on the relative merits of individual trustees versus corporate trustees. This article reframes the discussion by focusing on selection methodology, rather than type of trustee. Lawyers can help clients avoid estate-planning disasters by encouraging them to make better trustee-selection decisions.
“The best laid schemes o’ mice an’ men gang aft agley.” Robert Burns, To a Mouse, on Turning Her Up in Her Nest With the Plough (Nov. 1785).
What could possibly go wrong? Mr. and Mrs. Oh created revocable living trusts. (All examples herein are based upon actual cases; names are altered.) When Mrs. Oh died, Mr. Oh became trustee of her trust, which was to be divided into marital and credit shelter shares. He failed, however, to do so. When Mr. Oh died, the IRS challenged the estate tax return. At issue was whether distributions he had made came from the credit shelter or marital shares. The estate claimed they came from the marital portion, reducing the amount subject to estate tax. But since Mr. Oh never actually divided the trust into shares, there was no way to substantiate this, and the IRS prevailed. The failure to divide a trust into shares is a frequent trustee misstep.
What could possibly go wrong? Ms. At created a 5 percent charitable remainder trust (CRT) and named Mr. Mac trustee. He never paid Ms. At any of the distributions required by the terms of the trust, and the IRS challenged the validity of the CRT. Because the failure to make required distributions from a CRT violates IRC § 664(d)(1)(A), various charitable deductions were lost, resulting in a tax deficiency over $2.6 million. (What if Ms. At told the trustee she did not want any income from the trust? If so, an outright gift to the charity or to a donor advised fund, or a strategy incorporating a NICRUT, may have been better planning solutions. Nevertheless, the trustee should have known better.)
When trustees mess up, things can indeed go terribly “agley.” The errant trustee’s actions are the proximate cause of the resulting disaster, but the driver would not have been in a position to crash the bus had not the trust creator put them there. Trust creators who appoint inappropriate trustees therefore bear ultimate responsibility when their estate-planning buses run off the road. Mrs. Oh’s and Ms. At’s estate plans failed because of poor trustee-selection decisions during the planning process.
When people plan their estates, there is often much wailing and gnashing of teeth about who gets what and when. But when choosing successor or testamentary trustees, clients usually consider family members first and often default to their oldest or smartest child. (People often refuse to even consider a corporate trustee because they want to avoid the trustee’s fees. That’s addressed below.) This decision is among the most important in the estate-planning process and should not be made in haste, nor based upon irrelevant criteria. The right choice can result in efficient and effective administration and passing of an estate on behalf of family and loved ones. The wrong choice can result in a mess, perhaps a costly one, as the Oh and At examples illustrate. See Charles (Clary) A. Redd, The Most Disrespected Decision in Estate Planning, Trusts & Estates, July 2014, at 13.
Lazy selection criteria such as oldest or smartest child are simply unrelated to a trustee’s duties and functions, and are therefore apt to result in the choice of inappropriate trustees. If you’re asked to choose a runner for the relay race at the annual family retreat, do you select your oldest or smartest child? No, that’s ridiculous! You choose the fastest runner because that’s directly related to the task and therefore more predictive of a successful outcome. When clients select trustees, they need to apply relevant criteria, such as an individual’s attitudes and competencies.
An attitude is “a way of thinking or feeling about … something, typically one that is reflected in a person’s behavior.” Attitude, Lexico, lexico.com/en/definition/attitude (last visited June 30, 2022). For example, a person’s attitude toward sports may be totally invested, mildly engaged, ambivalent, or completely disinterested. Here are three attitudes essential for trustees.
Attitude Toward Rules, Obligations, and Responsibilities. A trustee has many responsibilities, expressed in the trust agreement and imposed by statute and case law. A trustee’s attitude toward rules and responsibilities is therefore of utmost importance. A trustee who is not generally inclined to take rules seriously may act contrary to law or the trust creator’s intent, completely ruin the estate plan, and perhaps incur personal liability. Therefore, the ideal trustee will be deferential toward rules and inclined to do things “the right way.” The trustee’s attitude toward rules and obligations should be aware, reverent, accountable, and committed.
Attitude Toward Decision-Making. Trustees are more than mere custodians; they are usually empowered to make important decisions as the trust creator’s proxy. Some of these decisions may have significant consequences for beneficiaries. Therefore, a trustee’s attitude toward decision-making is crucial. A trustee should make informed, confident, and thoughtful decisions. Her attitude toward decision-making should be thoughtful and deliberate, not dismissive, impulsive, or tentative.
Attitude Toward Others. Trustees must act solely in the best interest of the trust’s beneficiaries and keep beneficiaries informed. They need to interact with beneficiaries who request money or information. Therefore, a trust creator should assess a potential trustee’s “attitude toward others.” The trustee needs to be sensitive to the beneficiary’s needs and best interests.
Beneficiaries may suffer from substance abuse or face other challenges that will not magically disappear when the trust creator dies. They often resent the fact that their inheritance is held in trust and may focus their anger on the trustee. They may badger or even threaten the trustee. A trustee must be able to rise above that and focus on the beneficiary’s needs and best interests, according to the trust creator’s instructions. A trustee should be engaged, caring, concerned, and responsive. He should not be arrogant, condescending, or dismissive. A trustee’s attitude toward others should therefore be loyal, patient, respectful, and understanding, yet firm.
In addition to these attitudes are various competencies that are requisite for successful performance of a trustee’s responsibilities. A competency is a person’s ability to perform a certain job or task successfully because of her skills, knowledge, and capabilities. (This is consistent with the way the term is used by human resources professionals.) See Soc’y for Hum. Res. Mgmt., https://tinyurl.com/4umkrx2s (last visited July 2, 2022). See also Sarah Beckett, What’s the Difference Between Skills and Competencies?, HRSG blog (Mar. 14, 2018), https://bit.ly/3I43HQn. Here are two competencies essential for trustees.
Can Responsibly Handle Money, Investments, and Finances. A trustee is responsible for all the “stuff” that is in the trust. Nonfinancial property such as real estate, collectibles, jewelry, or airplanes should be secured, valued, monitored, insured, and managed. Trustees may need to handle financial assets according to applicable prudent investor statutes (as of this writing, 46 states have adopted some version of the UPIA). Unif. Law Comm’n, www.uniformlaws.org (last visited Aug. 1, 2022). Clients need a trustee who is able to handle these tasks.
What could possibly go wrong? Ms. Ken died in 2007 and left most of her estate to a charitable foundation. Over 80 percent of the estate consisted of GE stock. The executor-trustee retained the stock without diversifying, even while it fell precipitously in value, eventually selling it at a substantial loss. The state attorney general objected on behalf of the foundation, and the court held that the executor-trustee did not act prudently.
The ability to properly handle a trust’s assets depends upon experience, awareness of risk, and knowledge about financial assets, terms, and concepts, such as diversification and asset allocation. The trustee should be familiar with basic financial instruments such as stocks, bonds, mutual funds, and ETFs, and also with various types of risk. A typical individual trustee is often well-advised to engage the services of an experienced financial advisor to help with financial assets but needs to be knowledgeable enough to reasonably assess the advice that is given in light of her responsibilities as trustee. Clients should observe whether a potential trustee:
Is Well-Organized, Pays Attention to Detail, and Keeps Good Records. Trustees are charged with providing the trust’s beneficiaries with information about the trust and its assets. A trustee must be able to keep accurate and complete books and records and must, at a minimum, keep the trust’s accounts, assets, and records separate from her own personal accounts, assets, and records. Statements from investment and bank accounts in the name of the trust should be reviewed and retained, as should tax returns. If the trust is paying bills for beneficiaries, the trustee should be able to make sure that they get paid on time and should keep records of those bills and payments.
If the trust owns nonfinancial assets, such as real estate, those records need to be kept in an organized way, too; for example, records about fees, taxes, insurance, repairs, rental income, and so forth. Therefore, a trustee needs to be well-organized. Clients should observe whether a potential trustee:
Has Time to Devote to the Job. All the attitudes and competencies in the world are irrelevant if the successor trustee does not have the time or inclination to do the job. People are busy! They have families, civic and social commitments, jobs, kids who play soccer, and so on. Does the potential trustee have the bandwidth to take on what is essentially a second job?
Is Likely to Outlive the Trust Creator. If a successor or testamentary trustee is close to the trust creator’s age, then at the time when the trust creator is no longer able to drive the bus, the successor trustee may be unwilling or unable to do so as well. My rule of thumb: include a successor trustee who is at least 10 years younger than the trust creator, or perhaps a corporate trustee, as a safety net.
Many more trusts have individual trustees than corporate trustees, and in many cases, perhaps most, this may be appropriate and successful. The chances of a good result increase greatly if relevant selection criteria, such as an individual’s attitudes and competencies, are used to select those individual trustees. What about corporate trustees? There are right and wrong ways to choose them as well.
“If you think it’s expensive to hire an expert to do the job, wait until you hire an amateur.” Attributed to Red Adair, expert at extinguishing oil well fires.
There are many planning scenarios where a corporate trustee might be appropriate. It’s crucial to appeal to relevant criteria to decide whether or not to use a corporate trustee, and also to choose between potential corporate trustees.
What could possibly go wrong? I received a call from a financial advisor about a man in Ohio who is trustee of a trust for his brother in California. The brother is totally undependable and is a handful to deal with. Looking after his brother’s finances has become a tremendous burden for the trustee and his family, and he no longer wants the job. On the flip side, I also got a call about a trust beneficiary in Pennsylvania who wants to remove her brother as trustee of a trust for her benefit. The brother lives on the West Coast and is often slow or completely unresponsive to requests for money or information.
The problem in both cases is that the trust creators chose inappropriate successor trustees. These situations screamed for unrelated, independent trustees, which often means a corporate trustee, yet the trust creators named related family members instead.
I wrote above that inappropriate individuals are often nominated to be trustee because trust creators resort to irrelevant selection criteria, such as oldest or smartest child. The same thing happens with respect to corporate trustees. Many clients, and some of their advisors, too, believe that the key factor to consider when deciding whether to use a corporate trustee is cost. They may believe that corporate trustees charge hefty fees and that appointing an individual, usually a family member, can minimize the cost. Neither is true.
Corporate trustees certainly charge fees for their services, just as do lawyers, accountants, and financial advisors. Fees vary from one bank or trust company to the next, but I’ll suggest .75 precent to 1.5 percent as a wide, but representative, range for discussion purposes. A particular corporate trustee’s fees for a particular trust may be more or less, but fees within this range are certainly not unreasonable.
In Greek mythology, recently deceased people pay Charon to ferry them across the river Styx from the land of the living to the land of the dead. If you don’t pay, you don’t cross, and you might be condemned to wander for 100 years. Can you avoid the ferryman’s fee by appointing an individual instead?
No. The estate-planning highway is a toll road, and the toll is going to be paid no matter who drives the bus. Susie Successor will maintain an investment account, and also a checking account for paying bills. She’ll need an accountant for the trust’s accounting and tax returns, and maybe a lawyer for guidance. The cost for all that may be roughly equal to the fees a corporate trustee would charge for essentially the same bundle of services. (The investment account alone could cost 1 percent or more.) See Amy Fontinelle, How to Cut Financial Advisor Expenses, Investopedia.com (updated Feb. 15, 2022) (“The average fee for a financial advisor generally comes in at about 1 percent of the assets they are managing.”). That’s because corporate trustees have in-house expertise to handle tasks that an individual will pay for à la carte. I submit most clients don’t understand this.
The right way to decide whether to use a corporate trustee is in light of the attributes that corporate trustees bring to the table, and whether these are relevant to the particular planning scenario. Principal among these attributes are independence, knowledge, and oversight.
Independence. What could possibly go wrong? Siblings often squabble over this or that after the death of a parent, but this is exacerbated greatly when one of them is put in charge of another’s inheritance. Resentment or hostility can alter the family dynamic forever.
In a blended family, the spouse who dies first (Spouse 1) may provide for money to be held in trust to support the survivor (Spouse 2), but, at the survivor’s death, the remaining funds shall pass to the children of Spouse 1, not to Spouse 2’s children. If the trustee is a child of one of the spouses, the trustee will have an inherent conflict of interest, and the children of the other spouse may be suspicious and distrustful. Again, a stable family dynamic may be damaged.
If you imagine an independent trustee in these situations instead of a family member, the outcome changes dramatically. The emotion is drained, and family relationships are not altered. They may be able to continue to enjoy Thanksgiving dinner together! So an important consideration is whether the client’s goals and situation indicate a preference for an independent trustee. For a discussion of circumstances where a family member trustee may not be ideal, see Richard Ausness, Keeping It All in the Family: The Pitfalls of Naming a Family Member as a Trustee, 34 J. Am. Acad. Matrim. Law. 1 (2021). See also Scott Johns, The Tacoma Bridge … and Other Planning Disasters, 36 Prob. & Prop., no. 4, July/Aug. 2022, at 26.
Knowledge. What could possibly go wrong? Above, we met Ms. At, whose trustee failed to follow the rules applicable to CRTs, with financially disastrous results. Sometimes clients create “specialty” trusts, such as CRTs or supplemental needs trusts, that must be administered according to specific rules. In such cases, a corporate trustee will have knowledge and experience that an individual is not likely to have.
Even outside the realm of specialty trusts, a client may have considered various family members’ attitudes and competencies but found no one qualified to be successor trustee. A corporate trustee may be a reasonable alternative, qualified to step in and do the job.
Oversight. What could possibly go wrong? DeeCee received over $300,000 as settlement of a lawsuit. A sister and nephew were named co-trustees. A scant six months later, only $3,000 remained. The trustees spent most of the money on themselves, for fancy cars and so forth. They “got away with it” because most often no one is responsible for monitoring the conduct of individual trustees.
Corporate trustees, on the other hand, are subject to state or federal banking laws and are audited by their regulators to ensure compliance with applicable regulations and internal policies. In general, trust accounts will be less susceptible to mismanagement, and therefore safer, when a corporate trustee is at the wheel. If oversight is a concern or brings peace of mind, a corporate trustee may be selected.
An inappropriate individual trustee can completely crash an estate plan. The likelihood of a corporate trustee doing so is negligible—when a corporate trustee makes a mistake, it generally has the wherewithal to make good; a misbehaving individual trustee might not. See Robert Patrick, Ex-Edward Jones Worker Admits Stealing $188,000, St. Louis Post-Dispatch (Jan. 11, 2012), https://bit.ly/40QQCTb. An inappropriate corporate trustee, however, may fail to meet a trust creator’s expectations with respect to special assets or service; for example, it may not be a good match for the trust’s beneficiaries or may cause expense and delay by declining the appointment.
Not only do people often look at fees to decide whether to name a corporate trustee in the first place, but also they tend to do so as a way to choose between competing corporate trustees, for example, by comparing fee schedules. A “choose the cheapest” approach assumes that, because all corporate trustees provide essentially the same menu of basic services—day-to-day administration, investing and managing trust assets, and making distributions to or for the benefit of beneficiaries—they are fungible. But selecting a corporate trustee is not like buying gravel for your driveway or sand for a sandbox. They have “personalities,” and aspects of those personalities may differentiate one from the next, just like buses may have different features that make them better suited for one purpose than another, such as shuttling people from the parking lot to the amusement park or comfortably transporting cross-country travelers. Here are three important factors that make up a corporate trustee’s personality, and that can make one corporate trustee more appropriate than another for a particular client’s situation.
Service Model. A service model is the set of operational practices and rules according to which a company interacts with its customers. Trust companies may have very different service models, so the choice of one corporate trustee instead of another may affect how the client’s beneficiaries will receive the trustee’s services.
For example, some corporate trustees answer phone calls and emails in a timely manner, and others may not. Some may provide tiered service levels, wherein larger accounts that are most profitable receive an enhanced level of attention and service, or are assigned to more experienced personnel, yet more modest accounts may get a more generic level of service, for example, through a call center. Other corporate trustees may routinely assign designated trust officers to all accounts. Different corporate trustees differ with respect to the number of accounts or relationships they will assign to a trust officer. And some may provide for a relationship manager in addition to these account officers. This relationship manager could be a banker or a financial advisor, for example, who may be incented to see that the beneficiaries receive good service. How do you know? Ask!
Investment Policies. Corporate trustees can differ greatly with respect to the way they handle trust investments. For example, some use their own proprietary funds to invest trust assets, while others use commercially available mutual funds and ETFs. (If the proprietary funds cannot be transferred to another institution in kind, the trust may realize substantial capital gains when they are liquidated if the beneficiaries want to move the trust to another trustee.) Some buy individual stocks and bonds based upon their own in-house research or research they purchase, but others may employ affiliated or independent money managers to do the stock and bond picking.
Clients and advisors sometimes ask whether a corporate trustee will continue to hold the assets that are already in the trust when it takes over as successor trustee or instead sell all, most, or many of the holdings and reinvest in something else. The answer can be complicated and can depend on a number of factors, such as the trustee’s policy with regard to asset allocation or holding concentrated positions, for example. Depending on such factors, a corporate trustee may well reposition a portfolio, in whole or in part, to conform with its investment policies. The rules of the game change after the trust creator dies. A living grantor has no obligations to anyone other than herself. A successor trustee, however, has obligations to all of the trust’s beneficiaries, present and future. Ask the potential trustee about this.
Special Assets. Some trusts or estates may include assets such as commercial real estate; oil, gas, or mineral interests; business entities; agricultural land; private equity; hedge funds; art or collectables; and so forth. Some corporate trustees have in-house expertise for handling certain special assets, and others do not. Those who don’t may not agree to hold and manage them or may simply decline the appointment. In other words, some bus drivers will let any and all riders board the bus, but others have policies about what riders can and cannot be accommodated. A conversation about this with the potential corporate trustee in advance is appropriate.
Sometimes an individual trustee may be appropriate, and sometimes a corporate trustee may be selected. Either way, lawyers and other advisors should help their clients select the most appropriate successor and testamentary trustees. The Model Rules of Professional Conduct may impose on attorneys an ethical obligation to provide such counsel. Rule 1.1 says that competent representation of a client should be “thorough,” and Comment 5 to Rule 1.1 says that thoroughness is determined according to “what is at stake.” As we’ve seen, much can be at stake if an inappropriate fiduciary is selected. This entails more than asking clients who their oldest or smartest child is, where they do their banking, or comparing trustees’ fee schedules. Advisors should help clients focus on relevant selection criteria so that their estate-planning buses don’t end up in the ditch.
