Choose Wisely: Picking the Right Trustee

Choose Wisely: Picking the Right Trustee

My father’s big thing was fruit.

My older brother, irreverently analytical and with little regard for old-school propriety, attributed this hunger to psychosexual transference. My parents had six kids, the last in their 50s, leading me to doubt any sublimation theories. Dad just had odd priorities, I guess, as we humans do.

I spent 1990 working in London; it was my first exposure to finance, accounting, insurance and top-flight football. On return, the only thing my father wanted to hear about was the fruit, and with peaches in season in Massachusetts, that was his focus. No, he was not interested in that game with all the kicking.

Dad once instructed me how to rate a peach. I can only say the criteria are far too erotic for discussion on a sober business blog. Perhaps my brother was right; or perhaps old father was merely having a laugh. In any case, the English peach, small, fibrous and bland, did not pass muster. Dad’s look was disdainful, not of the failed delectable, but, as often, of me.

His face twisted in a familiar “you’re out of the will” grimace as he pronounced judgement: “Aww, you just don’t know how to pick ‘em.”

This leads us to the problem of trusts – in fact, of trustees, and how to pick them. Building a trust is no easy matter; it requires sophisticated planning as well as legal, tax and financial advice. Governing laws are strict and arcane, and the trust itself can be structured in nearly infinite varieties. Grantors can easily make a mess of things.

The problem, we think, is that the trustee decision is often left to the last, when the grantor is exhausted and wants to wrap things up. This is the wrong approach during a moment of truth. Sometimes the best person is a friend or family member, and sometimes it’s a professional. It all depends on the situation.

Take the example of special-needs trusts, established as a rule by concerned parents to care for disabled or otherwise challenged children. Parents often want to manage the trust during their lifetimes, which can work out as long as they have the skills to manage the trust’s assets. This can involve handling real estate, stocks, bonds, artwork and any other asset one could name. However, even with the best will in the world, few individuals are up to the challenge.

A reasonable desire to take personal responsibility, and perhaps save on management fees, can land the trust in a pickle of inadequate record-keeping, tax liability and other unintended consequences for the recipient. We recommend employing specialist trust managers, whether a company or individual practitioner, unless the parents have top-flight experience in managing the full range of their trust’s investments and assets.

Consider the case of direct support for a special-needs child. If the child is receiving federal or state benefits, the provision of cash or rent payments, known officially as In-Kind Support and Maintenance (ISM), can lead to reduction or outright loss of government benefits. Workarounds are sometimes available for rent coverage, but the best approach is to provide support that improves quality of life without triggering benefit loss.

Trusts can provide unlimited financial support for items not limited by ISM regulations. Extra medical care and therapy treatments can be funded. A computer, phone, furniture and items to fill the shelves, home entertainment equipment, education and vacation expenses. Essentially, anything that cannot be redeemed for cash, as stated under ISM rules, can be paid for by the trust, risk-free.

This illustrates the problem’s complexity and speaks to why professional trust management is often a good idea. When family members or trusted friends are selected, the choice typically hinges on one consideration: their dependability. This can be risky, as trust assets could be threatened by inexpert leadership. A financially savvy associate may seem a good choice, but they may simply be too busy in their own careers to focus on the trust.

When a trust is complex and holds sophisticated assets, skill and time are needed to manage it. A professional is called for. Government regulations on trusts are complex, as are related tax issues, both state and federal. There are significant consequences for mistakes.

Professional help is at hand, both from individuals who specialize in running trusts and corporate trust-management firms. Hiring individuals is seen as a cost-saving move, but this often proves a false economy. Individual trustees can rarely go it alone: they need to hire tax lawyers, accountants and investment professionals to guide the trust’s operations, and all of the above cost money. Trust-management companies employ these specialists in-house, so a larger up-front outlay may be less costly in the long run.

Larger trust-management firms may have affiliate offices in states where income and capital-gains taxes are low, allowing the trust to be domiciled advantageously. Big firms are better equipped to handle complex record keeping and are subject to regular audits by banks and regulators – not always the case with individuals. They also offer enhanced liability protection: in the event of a lawsuit, there should be something to claim, while an individual could well end up bankrupt.

We’re accentuating our preference. Of course, the choice, as ever, depends on the individual client. For example, arguments against employing a family member might not apply in the cases of special-needs trusts.

One can also split the roles and have an investment trustee who is a professional, either a bank or other institution, and a distribution trustee who is a family member or friend. They dole out the cash.

We think big is better, but many factors come into play and the use of an individual professional trustee or an unusually qualified friend or relative can be the correct solution – should all the stars align.

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