Use of Independent Professional Trustees in Estate Plans

• Citation: Vol. 28 No. 2
• Publication year: 2022
• Author: Written by J. Christopher Toews, Esq.*
• topic: Business of Law,Trust Law,Family Law,Corporate / Commercial

USE OF INDEPENDENT PROFESSIONAL TRUSTEES IN ESTATE PLANS

Written by J. Christopher Toews, Esq.*

I. SYNOPSIS

Estate planning attorneys spend a lot of time preparing documents—wills, trusts, powers of attorney and others—which are designed to carry out the client's wishes when the client dies or becomes disabled. However, no matter how well a document is prepared, whether the plan works when the time comes depends as much on who is put in charge as on the technical quality of the documents.

The choice of a person or organization to execute the client's estate plan when the time comes is critical to the success of the plan and deserves much more careful thought than it typically receives. For the reasons stated below, the best choice for many plans may be an independent professional fiduciary. A second choice which also works in many situations is to nominate a family member who then retains a professional fiduciary in an agency capacity to assist with administration of the plan. Since most plans today are based on a revocable living trust, the discussion below refers to the fiduciary generically as a "trustee." The considerations, though, apply as well to other fiduciaries, such as executors or agents under a power of attorney.

The Appendix to this article includes several forms suggested for use in accomplishing client goals.

II. FAMILY MEMBERS AS TRUSTEES

For many years it has been standard practice for clients to designate one or more family members as successor trustees of the family revocable trust—typically a spouse, then children in the order of their ages. Since many clients set up their trusts with a view to saving money, they may think that it makes sense to save even more money by not hiring a professional to manage settlement and distribution of the trust estate when they are disabled or have died. However, this approach involves a failure to understand the work that a fiduciary must undertake and a mistaken assumption that a family member who serves will not collect trustee fees.¹ This cost-conscious approach may also involve the client's failure to realize—or be reminded—that (from the client's point of view) the most important feature of the trust is its power to deal with the client's assets and care while the client is alive and disabled. A key service that an estate planner provides is a reminder that a single-minded focus on settlement of the trust after the client's death is a mistake.

While there is no doubt that some family members make good trustees, it is also clear that many of them do not, and that many trust administrations and settlements are more contentious, time-consuming, and expensive than they need to be because the appointed successor trustee is unable or unwilling to do the job. Some of the main problems are discussed below.

A. Personality Traits; Availability

Being a good trustee is not only a matter of intelligence and training but is at least in part a function of the personality of the proposed trustee. Is the proposed trustee honest, conscientious, dependable, organized, and fair-minded? Is the proposed trustee adaptable and good at listening to the opinions of others, yet willing to draw lines in the sand when that is required?

An attorney's direct questions on these matters may not necessarily yield reliable answers, but there are ways of getting the basics in an initial interview. For example, the attorney can ask whether the proposed trustee has a stable family life, steady employment, or financial troubles. The attorney can also inquire regarding the proposed trustee's ability to get along with siblings and others concerned with the plan. If the answers to these questions raise red flags, then the client should be counseled on the advisability of nominating a different trustee.

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A related inquiry is whether the proposed trustee will be available to do the job when the time comes. Is the proposed trustee the same age as the client? Is the proposed trustee a busy professional or a person with several children? Does the proposed trustee live near the client? Is the proposed trustee proficient with technology?

Even if the proposed family trustee checks out in these areas, there may be other reasons that it would be better to choose an independent trustee to administer the client's trust.

B. Conflicts of Interest

A family member who undertakes the role of trustee is usually a residual beneficiary of the trust, meaning that the trustee arrives at the job with built-in conflicts of interest. On the one hand, the trustee is required to administer the trust in a way which is fair and impartial, and to treat all beneficiaries equally. On the other hand, scrupulous fairness may often adversely affect the trustee's personal interests.

Such conflicts are not merely theoretical but arise in many, if not most, trust administrations. For example, the trustee will have conflicts when:

• The trustee needs to decide how much money to spend caring for an incapacitated settlor;
• The trustee needs to decide whether or not to charge trustee fees and, if so, in what amount;
• The decedent maintained a substantial joint bank account with the successor trustee where there are indications (e.g., "I want all of my children to share equally") that the decedent intended the account to be shared upon final distribution;
• The plan of distribution calls for distribution of property to the trustee in kind and the trustee needs to decide what to sell to support an incapacitated settlor;
• The plan of distribution calls for distribution of property to the trustee in kind and there are issues about valuation of the property;
• The trustee is a professional (e.g., lawyer, accountant, real estate broker) who renders services to the trust and has to decide whether and how much to charge for those services;
• There is a dispute with one of the beneficiaries and the trustee needs to decide whether to treat the costs of settling the dispute as a general administration expense or as a charge against the share of the beneficiary.

It will always be possible for a dedicated and conscientious family trustee to manage around these issues, but the fact that the role of trustee/beneficiary has such potential for abuse may result in perceptions that abuse is happening even when it is not.

C. Sibling Rivalries and Other Relationship Issues

The other important fact of life for many, if not most, family trustees is that they have a history of less-than-cordial relationships with other beneficiaries. In traditional families, the fact that a particular child has been named as trustee may reinforce perceptions by younger siblings, justified or not, that the parents have always favored that child's interests. In fact, some clients want to name all of three or five of their children as successor co-trustees to avoid perceptions of favoritism despite the obvious logistical challenges of such an arrangement.

The relationship issues are typically even more difficult in blended families where beneficiaries include stepparents or children by prior marriages. While not always justified, stepparents are often perceived to be interlopers and inheritance-spenders by the children of the decedent.²

D. Evaluating Family Members as Potential Trustees

At a minimum, the factors discussed above warrant a searching review and analysis of the likely consequences of naming a family member as a successor trustee. In particular, clients should be advised to carefully consider whether, taking into account intelligence, personality type, historic relationships with other beneficiaries and potential conflicts of interest, it is reasonable to expect that a proposed family member trustee will do an adequate job. If the analysis raises serious questions based on any of these factors, clients should be advised to consider naming an independent party as successor trustee.

Further, and even if a family member is nominated as successor trustee, estate planning documents might provide that a family member named as trustee may nominate an independent trustee to serve in the nominee's place if the earlier analysis proves to be flawed or if circumstances arising later warrant the appointment of an independent trustee.

Samples of language that address this issue are at Appendix A.

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III. WHO MAKES A GOOD TRUSTEE?

A. Banks and Trust Companies

Until recently, clients who wanted a professional trustee had few choices, most of which were banks or trust companies. However, banks seem to have largely withdrawn from the trust business, at least to the extent that it involves settlement and distribution of small to medium-sized estates on the death of the settlor.³ The work of settling these estates is labor-intensive and not particularly profitable, and also may involve potential conflicts of interest with the lending and investment activities of the institution.⁴ Banks that have continued in the trust business typically are interested only in larger estates with substantial investable assets, and prefer trusts that will be administered over a substantial period of time over trusts that will be distributed shortly following the death of the settlor.⁵

Some major brokerage firms have trust affiliates that will serve as trustee.⁶ However, all of these companies have substantial and continuing conflicts of interest in that their banking and investment services are provided through the companies that own them. In the author's experience, one such company required the client's trust to contain comprehensive language authorizing the purchase of in-house funds and other self-dealing by the trustee. Further, these companies typically have offices only in major cities and target their services at high-net-worth clients, making them unsuitable for mid-size estates, especially ones located outside major urban centers.⁷

B. Accountants, Lawyers, and Financial Advisors

Until recently, clients who wanted a non-family trustee other than a bank or trust company often sought the services of trusted professionals...