Trustee SelectionLangdon Owen
July 12, 2008 — 1,309 views
The selection of an appropriate trustee is of concern for anyone establishing a trust. A good trustee will provide real tangible benefits and a bad trustee will provide nothing but nightmares. This Article contains thoughts on the subject of trustee selection which counsel drafting trust instruments may find useful in dealing with clients.
General Selection Criteria. Any trustee of any trust should have certain fundamental characteristics. Does a trustee need to be a saint? No, but it would be a step in the right direction. Standards of trustee integrity and skill are quite a good deal higher than for the general business world with which most people are familiar.
Honor. The trustee should be absolutely honest. If there is any doubt on this matter, the inquiry should end - this is not the person who should be a trustee. In this context, honesty includes not just a lack of lying, stealing, and cheating, but goes further to include the ability to honorably meet the trustee’s major duties to the trust: to be loyal and operate the trust for the benefit of the beneficiaries, to avoid any self-dealing or conflicts of interest, to accurately and unflinchingly account for the trust’s and the trustee’s performance, and to keep the beneficiaries informed of their rights relating to the trust. A trustee must have the unhesitating ability to withstand pressures, sometimes from surprising sources, including spouses or other family members, to compromise where appropriate and stand firm where appropriate on the numerous little things which alone or in the aggregate can destroy the trust of the beneficiaries, as well as on the fewer, bigger things which would be or could be abusive of the trustee’s position. Everything a trustee does must be able to not only withstand, but to shine in, the light of day.
Financial Ability. The trustee should have money and property skills. This does not mean the trustee must have the investment expertise of a professional - the trustee can always hire a professional advisor. The key characteristic is the ability to understand financial matters and to make prudent financial and investment choices. The trustee must be proactive and cannot be neglectful; must be prudent and not easily swayed by sales pitches; must be practical and able to fit general financial concepts to the particular needs of the trust. The trustee will need to make investments over the life of the trust and will need to plan ahead to maintain some liquidity to meet the goals of the trust. The trustee will need to be able to foresee many of the needs of the beneficiaries and plan to meet those needs. The trustee will need to know what he or she doesn’t know and seek cost-effective and sound advice. The trustee cannot blindly rely on advice, however, but must use the trustee’s own sound judgment as to what makes sense for the trust.
People Skills. The trustee will need to be able to effectively deal with the beneficiaries, and with others, too. The trustee should have a good understanding of the family dynamics; this understanding may be obtained by talking with the family members and others and the need for such understanding in no way disqualifies a nonfamily member from being a trustee if he or she is willing to look into the relevant matters. However, the trustee should not be so personally involved in any controversial family matters that he or she has some axe to grind or is perceived as being biased for or against some family members. The trustee must not only be honorable, but he or she must be able to consistently command the respect of the beneficiaries for having such honor; a misperception by a beneficiary can create wasteful conflict. The trustee needs to be able to listen well to the beneficiaries and have some empathy for their position, yet have the backbone to say “no” clearly and emphatically in appropriate circumstances. A trustee may, by reason of his or her position, have great power and influence in the family, yet must be humble enough to realize that he or she cannot possibly have all the answers and that he or she will need a good deal of input from others in order to make sound decisions and even then could be mistaken. A trustee will need to have the strength of character to be able to patiently persevere through many a thankless task, even at times of personal pain; the trustee’s people skills are not just external, but must be internal, too.
Longevity. Some trusts can last years, even whole lifetimes. It is of benefit to the trust and its beneficiaries to have continuous and consistent management. Thus, the health, age, and mobility of the trustee are factors to be considered. In the best situation, the trustee will be in top form and will perform throughout the term of the trust without any need for a replacement; but to get the benefit of mature judgment and experience, it may well be necessary to come to a balance on the expected length of service of a trustee. The trustee should keep records and otherwise act to make any future transition a smooth one.
Follow Trust Instrument and Law. The trustee must follow the trust instrument and comply with applicable law. Thus, the trustee must have the ability to understand legal concepts and apply them to the particular circumstances of the trust and its beneficiaries. The trustee should be able to recognize the need for legal and accounting help and be willing to seek out and follow appropriate advice.
Disability Trust Concerns. All the foregoing general matters relating to trustee selection apply even more emphatically to trusts for beneficiaries suffering from a disability. Disability trusts are more likely to run a whole lifetime than other sorts of trusts, and consistent treatment of the beneficiary over the long term will often be of greater importance to a disabled beneficiary than to fully-abled beneficiaries.
The main beneficiary, to an extent depending on the depth of the disability suffered, may well not be able to fully understand the functioning of the trust or to personally oversee and provide constructive criticism or input as to the performance of the trust and its trustee. The beneficiary is much more likely to be strongly, or even wholly, dependent on the proper functioning of the trust and the good faith and good judgment of the trustee for rather basic day-to-day needs or comforts, and a failure of a disability trust to function properly can be very immediately and personally painful to a disabled beneficiary. Careful, consistent, and conservative trust management will be a primary concern for a trust for a disabled person and risks which might be quite reasonable for other sorts of trusts may well be inappropriate for disability trusts.
Beneficiaries with the greatest needs can at times be, or at least seem, the most demanding, sometimes unreasonably so. The same can be true of those who provide care for and who love the disabled beneficiary - they may push the trustee well beyond the usual extent. This sort of push comes from the right emotional place but may not be balanced by a longer or broader view. The trustee’s job is just harder when disabled persons are beneficiaries, and thus, unfortunately, it is also often harder to recruit the sort of trustees these beneficiaries so greatly need.
Furthermore, the nonsupport, special needs trusts used for disabled persons who are on government assistance, often tend to be of modest size. This can make it difficult to adequately compensate the trustee, again adversely affecting recruitment. Some people will have a tendency to see adequate compensation for a trustee as exploiting the disabled person because these people will not have a clear understanding of the trustee’s efforts or responsibilities.
Most, perhaps the vast majority, of initial family trustees for disabled persons act as such from a personal emotional commitment to the disabled person and are willing to take on this tough job even without adequate, or sometimes without any, compensation. Such persons can prove to be exemplary trustees. However, as the initial trustees die, become disabled themselves, move away, or otherwise become unavailable to serve, it can be very hard to replace them. The precedent of low or no compensation for the initial trustee may then become a barbed wire fence of unrealistic expectations which can keep others off the job.
Professional Trustees. Let’s compare some of the more important factors concerning the use of individuals as trustees or professional trust companies as trustees. Let’s remember the key characteristics a trustee should possess.
Honor. With individuals, honor is a personal attribute developed over a lifetime; where it exists it is often deep, strong, and inviolable. On the other hand, persons who appear honorable sometimes violate their honor when under financial or psychological pressure.
For a trust company, honor is an institutional mandate with institutional constraints and protections. Trust companies have recruitment programs designed to attract good people and human resource programs designed to train and develop the sense of honor, service, and professionalism in these people and to weed out those who do not make the grade. Also, trust companies are regularly audited by various state and federal regulators. The regulatory process tends to prevent abuses.
If, however, an error or individual dishonesty occurs, the trust company can generally respond in damages, usually directly but sometimes through bond or insurance proceeds. Regulations require trust companies to maintain certain proportions of net capital which can fund such recoveries. Individual trustees may also be bonded against the worst sort of dishonest acts; but most trusts are drafted to require no such bond because it is an expense with little benefit. The sorts of dishonorable acts found among individual trustees tend to arise more from conflicts of interest and such problems and less from outright theft, thus recovery (if any) against a fiduciary bond is not always a clear-cut thing. The ability of an individual to respond in damages will vary with the financial situation of the individual and will probably change, for better or worse, over time.
Langdon T. Owen, Jr. is a member of the law firm of Parsons Kinghorn Harris, p.c. in Salt Lake City, Utah. Mr. Owen is a transactional lawyer who practices in the areas of estate and tax planning, business and commercial transactions involving both corporate and partnership taxed enterprises (including tax, employment, and benefit issues relating to such transactions), loans and creditors' workouts, pension and profit sharing plans, health care law, probate, and real estate. He has practiced law since 1977.