Who is the ideal Trustee?*

By Joe Price from the MO Planning Business & Estate Planning Blog

Let’s first begin with the question “What is a trustee supposed to do anyway?” The Big Three skills that a Trustee must have would be (1) Administrative, (2) Investments and (3) Judgment. Let’s explain each one of those:

Administrative.  Administrative duties of the trustee include record-keeping, tax return preparation, sending notices to beneficiaries, making sure that distributions are made to beneficiaries, etc. These are not the sort of activities that you can expect a family member to carry out properly unless the family member happened to be a trust officer, an accountant or a tax attorney. Your average non-professional will struggle with these duties no matter how conscientious they are because there are so many laws and procedures to become familiar with.

The sad fact is that a non-professional person serving as trustee without a professional assisting him or her is likely to violate one rule or another and wind up in a judicial proceeding or worse.

Investments. The trust estate must be invested in accordance with various rules including the Prudent Investor Act and/or the provisions in the Trust Agreement. And of course, you’d probably want the trustee to generate reasonable investment returns.

Judgment. The Trust agreement will contain instructions on how the trust estate is to be distributed to the beneficiaries or accumulated for later distribution to the current or future beneficiaries. However, those instructions may be fairly vague. They are likely to say things like “the Trustee may pay to or for the benefit of the Beneficiary such amounts of the net income and principal as the Trustee considers to be appropriate to provide for the Beneficiary’s health, education, maintenance and support.”

In other words, the instructions are likely to give the Trustee a lot of leeway in deciding whether to make distributions to the beneficiary and if so, in what amount.

It would be wonderful if one person had all three of the above listed skills as well as the time to carry out all of his or her obligations as trustee. The fact is that very few folks have more than one of those skills and even fewer of those people have the time to carry out their obligations.

An arrangement that is more realistic than waiting for a family member to develop all three of the above skills is to name two parties who between them have all three skills. So that is most likely to be an individual and a bank (or trust company). However, it could also be two individuals or two individuals plus a bank or trust company.

The ideal arrangement is one where each party plays to his or her own strengths. For example, a bank or trust company will be better suited to handle the Administrative duties and may also handle Investments well (however, the client may want his or her investment Adviser to handle the Investments side and request that the bank or trust company handle only the Administrative duties). The Judgment skill will usually be handled by a family member or a trusted family adviser.

Why will this arrangement likely work well if the right family members and companies are chosen?  Put simply, the bank or trust company is more likely to do a better job on Administrative matters than a non-professional could and the family member is more likely to stay in touch and be aware of the issues in the life of a trust beneficiary than a bank or trust company would.

One more thing – it may make sense for a grantor to name multiple parties to make decisions on behalf of a beneficiary (as a panel or committee). For example, a family member may not want to serve as a trustee if he or she felt that a beneficiary would be resentful if the trustee withheld distributions from that beneficiary. However, the family member might be more willing to serve as trustee if three family members served as a decision-making board for making distribution decisions and those decisions were made by majority vote.

*In this article, we are talking about trusts other than revocable living trusts where the grantor is still alive and controlling. The grantor is the ideal trustee in those cases.

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