There are three places where your assets are going to go: the government, charity or friends and family. If your money is going to go to friends and family, place it in a trust to ensure it is properly structured to be protected from creditors. This can give your family the freedom they need to enjoy those assets as if they owned them out right. When putting your assets in a trust, though, how do you go about electing a trustee?
The choice generally comes down to a family member or professional. When you are faced with selecting a trustee, consider the following. In California, the governing statute currently states that the trustee administer the trust with “reasonable care, skill and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character with like aims to accomplish the purposes of the trust as determined from the trust instrument.” That is the standard that both corporate and individual trustees are all held to.
The following are other items to consider when selecting a trustee.
Avoid Conflict. Trustees are responsible for avoiding conflicts of interest and managing a trust solely for the beneficiaries. The trustee cannot use the trust assets for the trustees’ own profit and should not have any adverse interests from the beneficiaries. While this sounds fairly straightforward, consider a family business that will be owned by the trusts where one of the key executives running the business is also a logical person to run the trust. If that person is selected as a trustee and has the responsibility of running the business, this can create a conflict.
Deal impartially with beneficiaries. Think of today’s world with blended families. If you are a trustee of a trust that pays out to a second spouse or the children of a prior marriage, every decision is going to be looked at very carefully by two competing groups. Every decision you make and how you invest or distribute the trust is going to be examined. A trustee has to enforce and defend claims of the trust. If the trust owns an apartment building and the tenant leaves, the trustee has an affirmative duty to file lawsuits to recover the lost rent. Not everyone has the time or the energy to do that.
If there are multiple trustees, they must make sure they are each participating in the trust in an active way. It is your responsibility to monitor what the other trustees are doing so if someone is acting improperly, you may have to bring it to the attention of the courts. All of these responsibilities apply whether or not the trustees are receiving compensation.
A trustee who does not live up to the standards of the trust or does something that results in a loss to the trust can be held personally responsible. The court has the authority to surcharge a trustee, so it is important to consider that liability as criteria when selecting a trustee. Keep in mind that any loss may or may not be able to be covered by the trustee in a loss. Make sure the trustee has an Errors &Omissions insurance policy and is able to pay it back.
Consider a revocable trust in case someone can’t continue as a trustee anymore. The successor trustee would then take over managing the resources without having to go to court and have a conservatorship. Bear in mind, though, that the trustee of the revocable trust might not be the same person managing the person’s personal needs – such as health care or medical decisions – and he or she might also be acting as a power of attorney or conservator. When setting up the plan, make sure that those two people get along and have a common outlook. One person managing the care may want the highest level of care while the person managing the trust may not want to spend the money. In this case, a judge will end up deciding how much to pay.
When selecting a trustee, you have a number of choices: an individual trustee, a co-trustee, a corporate trustee and a hybrid of individual and corporate trustees. When making that selection, be very thoughtful about how that trust is going to operate and what the role of the trustee is versus the beneficiaries. Talk to all parties and make sure that they are willing to take on the responsibility, as it does mean exercising discretion. Co-trustees in the right situation can be a real plus, as it involves sharing the more labor-intensive and time-consuming administrative responsibilities. A recent trend is a combination between a corporate trustee who keeps the records, sends out the account statements, has custody of the assets, and makes sure the rents are collected and the taxes are paid on time, while a combination of individual trustees who have a different channel of communication with the beneficiaries may be involved with family business and are involved with strategic decisions without the burden of the day-to-day administration.
If you have a minor child and are naming a guardian in your plan, make sure that they can co-exist and get along with the individual you are naming as your trustee who makes financial decisions. This can be particularly important when making decisions about education expenses.
The views of the authors of these articles do not necessarily represent the views of First Republic Bank. First Republic Private Wealth Management encompasses First Republic Investment Management ("FRIM"), the Luminous Capital division of First Republic Investment Management, First Republic Trust Company ("FRTC"), First Republic Trust Company of Delaware LLC and First Republic Securities Company, LLC ("FRSC"), Member FINRA/SIPC. FRIM, FRSC and FRTC of Delaware LLC are subsidiaries of First Republic Bank. FRTC is a separate division of First Republic Bank.
This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein.
Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. This document may not be reproduced or circulated without our written authority.
Past performance is not indicative of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that First Republic Bank and its affiliates do not provide tax advice. The levels and bases of taxation can change. Investors' tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document. Accordingly, you and your attorneys and accountants are ultimately responsible for determining the legal, tax and accounting consequences of any suggestions offered herein. Furthermore, all decisions regarding financial, tax and estate planning will ultimately rest with you and your legal, tax and accounting advisors. Any description pertaining to federal taxation contained herein is not intended or written to be used and cannot be used by you or any other person, for purposes of avoiding any penalties that may be imposed by the Internal Revenue Code. This disclosure is made in accordance with the rules of the Treasury Department Circular 230 governing standards of practice before the Internal Revenue Service.
Investment and Advisory products and services are not deposits or obligations of, or insured, guaranteed or endorsed by any bank, Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency, entity or person. The purchase of securities involves investment risks including the possible loss of principal.