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TEN REASONS TO SELECT A PROFESSIONAL TRUSTEE – Begley Report

by: Begley Law Group

By:  Thomas D. Begley, Jr., Esquire, CELA

[Article originally published in the Barrister] Attorneys prepare many types of trusts.  The trusts are for multiple purposes.  They include special needs trusts, standard support trusts, discretionary support trusts, disclaimer trusts, bloodline trusts, incentive-based trusts, retirement plan trusts, and trusts for Medicaid planning purposes. Occasionally, it is appropriate to have a family member serve as trustee.  However, in most cases it is better to retain the services of a professional trustee.  Ten reasons to employ professional trustees include the following:

♦ Target on Individual Trustee’s Back. Few people understand that a trustee has serious responsibilities in the administration of a trust.  If something goes wrong, such as the trust (1) makes improper distributions, (2) pays unnecessary taxes, (3) causes the beneficiary to lose public benefits, (4) is not in compliance with the instructions given by the grantor, or (5) the investment performance in the trust is poor, the trustee can be held personally responsible.  Since individual trustees lack expertise in these areas, they must understand that if they are appointed and accept the appointment, they have significant liability and are operating with a target on their back.  Liability extends to a trustee’s personal funds.

♦ Knowledge of the Law

  • Taxes. A trustee must have a knowledge of income, gift, estate and generation-skipping taxes, including capital gains taxes.  If an individual trustee attempts to administer a trust and does not have proper knowledge of tax law, the adverse consequences can be significant.
  • Accountings. Trustees must make accountings to beneficiaries, courts and, possibly, public benefit agencies.  Trustees must have expertise in preparing these accountings.
  • Changes in Law. Laws change frequently.  Tax laws and public benefits laws particularly change frequently.  Corporate trustees know when these laws change and adapt accordingly.  Family members are often unaware of the changes and fail to comply with the new requirements.

♦ Investment Expertise. Good professional trustees have investment expertise, which is usually far superior to that of the proposed family member trustee.  Family member trustees tend to be too conservative, investing funds in Certificates of Deposit and other cash assets.  Others are too aggressive investing funds in growth stock without a view toward a proper balancing of the investment portfolio.  Professional trustees generally outperform family trustees in the investment arena.

♦ Avoidance of Family Friction. Are the client and his family as united as they first appear, or are they dysfunctional? At the time the money from the personal injury settlement becomes available, there is usually the appearance of harmony.  However, if the individual receives funds outright, it is very, very common for family members to impose on the personal injury victim for gifts and loans, which usually result in the personal injury settlement being squandered in a very short period of time. Besides family members, friends are also guilty of seeking funds either by gift or loan. Typically, loans to family members and friends are never repaid.

One of the reasons that parents establish trusts for their children is to protect the children from themselves.  If a brother is named as trustee for his sister’s trust and the sister wants money, the brother’s job is to say no if the request is inappropriate.  This naturally causes friction among family members.  Most parents want their children to life harmoniously, and appointment of a family member as trustee for another family member is an almost certain recipe to engender family discord.

♦ Special Circumstances

  • Drugs and Alcohol. Unfortunately, many beneficiaries of trusts suffer from drug or alcohol problems.  The trust document may contain restrictions on distributions to these beneficiaries.  Professional trustees are much more apt to understand these restrictions and have the courage to say no when a beneficiary suffering from one of these conditions requests a distribution that the grantor did not intend.
  • Spendthrift Children. Parents often set up trusts for spendthrift children to insure that the money will not be squandered. It is easier for a professional trustee to say no to unreasonable requests than it is for a family member to do so.
  • Can’t Hold a Job. If the trust beneficiary is unable to hold a job, it is unlikely that they are able to support themselves.  Are they unable to hold the job because they are lazy, because they have a disability, or for some other reason?  Again, it is easier for the corporate trustee to make this analysis, to obtain any help that the trust beneficiary may require, and to say no to inappropriate distributions.

♦ Avoidance of Conflict of Interest. Frequently, the family member selected to be the trustee of the Special Needs Trust is also a remainder beneficiary.  The more the trustee distributes to the beneficiary, the less will remain to be distributed to the trustee on the beneficiary’s death.

♦ Timely Administration. Corporate trustee are also much more likely to administer the terms in the trust in a timely manner.  Family members often are busy in their own lives and don’t have the time to study the trust document, understand the trust goals, understand all of the family dynamics, and fully understand the duties of the trustee.

♦ Knowledge of Public Benefits Laws and Disability System

  • Public Benefits. A professional trustee will have a good knowledge of public benefits laws and will keep abreast of changes.  These include SSI, Medicaid, Medicaid Waivers, SNAP, Federally-Assisted Housing, SSDI, Medicare, and Veterans benefits.
  • Disability System. Professional trustees are able to navigate the disability system to the advantage of the trust beneficiary.

♦ Trust Protector. One reason families are reluctant to appoint a corporate trustee is that they are not familiar with the personnel in the corporation’s trust department or how the trust works.  A trust protector, usually a family member, can be appointed in the trust document who is given the power to remove and replace the trustee with another corporate trustee.  This often gives the grantor enough of a comfort level, to consent to the appointment of a corporate trustee.

♦ Fees. Many individuals are reluctant to appoint a corporate trustee for fear of the fees that will be charged.  Most corporate trustees charge between 1% and 2.5% of the trust assets with a minimum fee.  The minimum fees often are a reason not to use a corporate trustee for small trusts.  However, it must be understood that a family member can also charge trustee fees.  If the family member has the good sense to invest the money with an investment manager, the investment manager will charge fees.  Usually, the superior investment performance of the professional trustee will cover all, if not most, of the trustee’s fee.  There’s an old saying, “You get what you pay for.”  In addition to good investment performance, the professional trustee will frequently save a trust beneficiary’s considerable amount of tax money by utilizing the tax laws to the beneficiary’s advantage.  An example would be offsetting capital gains with capital losses.

In conclusion, in most trusts of significant size a professional trustee should be considered.  In almost all cases, performance is better, fees are reasonable, and the ability to have a family member remove and replace the trustee gives the family establishing the trust a certain feeling of comfort.