TEN REASONS TO SELECT A PROFESSIONAL TRUSTEE

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.

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.
• 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.

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.

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.

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.

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.