From the May 2007 issue of Investment Advisor • Subscribe!

Making the Right Choice

How, and whom, clients should pick as a trustee

Clients often name a friend or relative as a trustee based on that person being "the responsible one." The friend or family member may even feel honored in being named to serve in this role. It sounds like a perfect arrangement, doesn't it? But is it? All too often, the answer is "No, it is not appropriate." Most people have no idea what it really

means to be a trustee and how much work it entails. The responsibilities involved are often complex and time-consuming. It may even prove to be overwhelming for those who lack the time, experience, and specialized knowledge required to administer the role properly.

Consider this real life example. Recently, we heard from an investment professional that she was overwhelmed, frustrated, and even annoyed with her role as trustee, assigned to her by her favorite uncle. She now describes herself as a combination of art dealer, bill collector, investment analyst, bookkeeper, property manager, business executive, tax specialist, secretary, and financial counselor. She feels that she now has an additional full-time job--and rightly so.

"Why me?," clients may ask. In this woman's case, it turns out that her uncle always felt that she was the responsible one in the family, the smart one. Furthermore, he told her that he'd get everything organized ahead of time, so it wouldn't be a lot of work. Ah, famous last words, coming on the back of such a high compliment. However, the outcome is that she is now under tremendous stress, and fond memories of her uncle are now clouded by aggravation.

So as your clients name their trustees, it is imperative that they think beyond the question of: "Is she a responsible, intelligent person?"

With that in mind, in this article we will provide you with a framework to help you work with your clients in their decision-making. While it can be challenging for clients to make such an important selection, it should never be a linear one, since we know a trustee must wear many hats. (See sidebar "Responsibilities of a Trustee.")

Thus, it is imperative that, before naming a trustee, clients are educated on what a trustee is and who is appropriate to assume the role. When determining a trustee's overall responsibilities and figuring out who should be a trustee, considerations should go beyond the duties and take into account the relationships among family members.

To do that, there are five questions your clients should ask themselves before selecting a trustee.

The first question focuses on "trust." Do your clients trust this person to be true to their interests? Will this person put your clients' interests ahead of his own interests? Remind your clients that they are leaving the decision-making to someone they most likely will not be around to oversee.

Second, are they focusing more on themselves in the selection process than on the potential trustee? Although the choice may feel right to your client, is it equally acceptable to the trustee?

To determine if the selection is the right fit, ask your client to consider these issues: Does the trustee's personality, career, and lifestyle afford the time to devote to the responsibilities of being a trustee? Is she detail-oriented and organized? Does he have the investment expertise to manage the trust assets? Will this be an overwhelming burden to the named trustee that could affect her performance in this vital role?

In addition to these considerations, your clients should also be aware that, even if the selected person has never previously served as a trustee, most state laws require that a trustee be held to a high standard of performance. Therefore, ignorance is not bliss; there are legal ramifications in the person's role as trustee.

If a client is insistent about appointing a person who may not entirely fit the bill, you may want to suggest a co-trustee--one who you know has the requisite skills and capabilities to complement the first choice. With different skills, a co-trustee can be a favorable solution, as long as there are procedures in place to resolve, for example, a deadlock in decision making between the trustee and co-trustee.

Family Dynamics

Another issue that could arise from the personal choice of trustee--and the third question your clients need to ask--is whether naming this person will cause family tension or a rift. Does the trustee occupy a position that might create conflicts of interest? Does that family member have problems dealing with other family members who will be beneficiaries? Can this person be sensitive to family dynamics and unbiased when decisions must be made?

This is especially pertinent today, with the increase of blended families and the resulting Qualified Terminable Interest Property (QTIP) trusts. As you will recall, the purpose of a QTIP is generally to create a trust that will be administered for the benefit of the current spouse, with the remainder passing to children of a prior marriage.

Imagine if one of the children were named trustee and decided not to follow through on the stepparent's request for some cash (i.e., discretionary distributions of principal). The outcome would not be pretty.

Sharing the Load

Now have your client consider the fourth question: How is the health of the chosen trustee? Sometimes naming just one person is not enough. Families, relationships, health, and lives in general change. In case the first trustee dies, does not want to serve, or is unable to take on this role, there should be one or more successors. Selecting one family member or friend for many people may be difficult enough, but coming up with two or three names may be impossible.

This leads to question five: Am I being penny-wise and pound foolish? Fees are often the primary reason clients will decide to designate family members or friends to serve as a fiduciary rather than a corporate trustee or other professional. Ironically, individual trustees often find they need to hire professionals to help, which in turn may eliminate anticipated cost savings, and may not be the professional that clients would have chosen for themselves.

By looking to a trustee who is external to a personal relationship, the client may more than benefit from the fee charged. The primary advantages of such experts are that they have knowledge, experience, tools, and personnel dedicated to administering trusts. More important, they are intended to operate in an unbiased, professional manner, which means they are responsible for executing the trust to the client's specifications and are not swayed by the opinions and impulses of family members or friends. An added benefit of a corporate trustee is that the beneficiaries can't outlive the trustee.

Whomever your clients choose, it is crucial that you encourage them to interview and discuss their trust with the potential trustee before naming that person in the document.

Furthermore, encourage your clients to inform their family members of the selection and why they believe it is the right choice. Like many issues that involve family, it is easier if there are no surprises. You may want to suggest having a family meeting to include the trustees, estate attorney, and accountant to ensure that everyone is on the same page. Very important from your vantage point, this can also give you an opportunity to network with these possible spheres of influence.

Moreover, if one of your clients is asked to be a trustee for a friend or family member, use this framework to help that client have a clearer understanding of what such agreements entail.

To learn more about guiding your clients in trusts and choosing a trustee, the American College of Trust and Estate Counsel (ACTEC) developed a helpful guide in 2005 titled, What It Means to Be a Trustee: A Guide for Clients. It offers insight into the different types, purposes, and provisions of trusts as well as the typical duties of trustees, including obligations as to distribution of assets, recordkeeping and accounting to beneficiaries.

As more baby boomer clients head into retirement, this issue will become an important part of the value you deliver. To be ahead of the curve, start having estate planning conversations today.

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