TEN REASONS TO SELECT A PROFESSIONAL TRUSTEE – Begley Report
by: Begley Law Group
By: Thomas D. Begley, Jr., Esquire, CELA
New Jersey estate planning attorneys prepare many types of trusts for a variety of purposes. Common examples of estate planning trusts 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. At the Begley Law Group, our knowledgeable team of trust and estate litigation attorneys are not only familiar with the governing laws, but are also skilled in the art of negotiation and litigation. For the past 80 years, Begley Law Group has been a leader in trust and estate litigation across New Jersey and throughout Southeastern Pennsylvania.
One of the most important decisions that the creator of a trust must make is who will serve as the trustee. 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:
♦ Avoiding the Target on Individual Trustee’s Back
Few people – including those named as trustees – understand that a trustee has serious responsibilities in the administration of a trust. The trust administration process is rife with opportunities to make innocent mistakes. And when something does go wrong, the trustee can be held personally liable to the trust and its beneficiaries. For example, a trustee might:
make an improper distribution,
pay unnecessary taxes,
cause a beneficiary to lose public benefits,
fail to comply with the instructions given by the grantor, or
invest trust assets poorly.
In each of these scenarios, the trustee can be held personally responsible. Since individual trustees lack expertise in this area, it is important they understand that by accepting an appointment, the named trustee may be exposed to significant liability and will be operating with a target on their back. Notably, liability will often extend to a trustee’s personal funds.
♦ Knowledge of the Law
While people commonly name friends and family as trustees, this is not always a good idea because these individuals lack the professional knowledge necessary to effectively administer the trust. Trustees must command more than a working knowledge of the following areas:
Tax Law. A trustee must have a knowledge of income, gift, estate, generation-skipping taxes, and 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 to the beneficiaries and, in turn, to the trustee.
Accounting. Trustees must make accountings to beneficiaries, courts and, possibly, public benefit agencies. Trustees must have expertise in preparing these accountings, as the failure to provide accurate accountings can hold up trust assets and may ultimately subject the trustee to personal liability.
Changes in the Law. Laws change frequently, particularly tax laws and public benefits laws. Corporate trustees know when these laws change and adapt their practices accordingly. Family members are often unaware of the changes and fail to comply with the new requirements. Again, this can risk the unnecessary depletion of trust assets, exposing a trustee to personal liability.
Unless a proposed trustee has experience in both tax law and accounting, they may not be prepared to serve as a trustee. By accepting appointment as a trustee, someone without the necessary knowledge takes on significant and unnecessary risk.
♦ Access to Investment Expertise
Good professional trustees have investment expertise, which is usually far superior to that of the proposed friend or family member trustee. Some family members who are named as trustees tend to be too conservative, investing funds in Certificates of Deposit and other cash equivalents. Other family members are too aggressive, investing funds in growth stocks without a view toward a proper balancing of the investment portfolio. Professional trustees generally outperform family trustees in the investment arena. This is crucial as many trusts remain in place for decades, making investment performance a primary concern.
♦ Prevention of Family Friction
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 live harmoniously, and appointment of a family member as trustee for another family member is an almost certain recipe to engender family discord.
This is especially a concern for those who recently obtained a large sum of money through a personal injury settlement or verdict. At the time the money from the personal injury case becomes available, there is often the appearance of family harmony. However, if an individual receives the funds outright, it is very common for family members to approach the personal injury victim for gifts and loans, which too often results in the funds from the personal injury case being squandered in a short period of time. Besides family members, friends are also guilty of seeking funds either by gift or loan. Of course, frequently loans to family members and friends are never repaid.
By electing to name a professional trustee, the burden to decide whether to make gifts or loans is removed from the shoulders of a family member and placed upon those of the professional trustee. The trustee must follow the intentions set out in the trust document, which may preclude such disbursements, ultimately preserving the value of the trust.
♦ Avoiding Familial Pressure and Other Difficult Situations
No family is perfect, and it is common for parents to have concerns about their children’s ability to responsibly preserve what they worked so hard to accumulate over a lifetime. Parents commonly express the following concerns, each of which can be addressed by naming a professional trustee:
Drugs and Alcohol. Unfortunately, many trust beneficiaries 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 who is 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 ensure 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.
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.
Saying no to family members is challenging, which is one of the key reasons why a family member may not make the best choice for a trustee. Professional trustees will exercise independent judgment, and are less likely to be swayed by emotional appeals.
♦ Escaping Potential Conflicts 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. This can create a conflict of interest that may result in the trustee failing to make appropriate distributions to preserve the value of the trust. A professional trustee is duty-bound to make distributions according to the terms of the trust, and will not stand to benefit from any unspent funds.
♦ The Timely Administration of Trust Assets
Even well-intentioned family members can end up delaying the trust administration process. In many cases, it takes many hours for trustees to familiarize themselves with their responsibilities. 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. This can seriously delay distribution requests, and may ultimately hold up trust assets if the trust falls out of compliance. Corporate trustees are much more likely to administer the terms in the trust in a timely manner.
♦ Advance Knowledge of Public Benefits Laws and the Disability System
One purpose of a trust is to preserve public benefits eligibility. Common benefits for trust beneficiaries include:
Supplemental Security Income (SSI)
Supplemental Nutrition Assistance Benefits (SNAP)
Social Security Disability Insurance (SSDI)
If a beneficiary who receives public benefits ends up with a lump-sum of cash, they may be thrust over the income or asset limit and their benefits may get shut off.
A professional trustee will have in-depth knowledge of public benefits laws and will keep abreast of important changes. Professional trustees are also able to navigate the disability system to the advantage of the trust beneficiary.
♦ Trust Protectors Can Provide Additional Assurances to Concerned Grantors
One reason many 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. A trust protector is given the power to remove and replace the trustee with another corporate trustee. Naming a trust protector may give the grantor enough confidence to consent to the appointment of a corporate trustee.
♦ Trust Administration Fees are Worth the Expense
Many families are reluctant to appoint a corporate trustee for fear of the professional trustee’s fees. As a general rule, most corporate trustees charge between 1 percent and 2.5 percent of the trust assets as a minimum fee. Of course, for smaller trusts, the minimum fees often are a reason not to use a corporate trustee, as there is often much less work involved in their administration. However, naming a family member as trustee does not necessarily avoid this problem, as a family member can also charge trustee fees.
Additionally, fees may not be able to be avoided. For example, if a family member trustee 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 most, if not all, 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 taxes 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.