Who can you trust… with your Trust?
June 4, 2013 Comments Off on Who can you trust… with your Trust?
I have a friend, I’ll call her Jane, who is setting up a revocable living trust. Jane will be the primary trustee. The problem is, Jane can’t decide who to name as successor trustee (the person who will take over at the death or incapacitation of the primary trustee). When we last spoke, her point to me was this: although she trusts certain relatives, she doesn’t know if she can really trust those relatives. Trust vs. trust. It’s a tough issue. We talked about each person she was considering and finally settled on a cousin who lives in the same state and with whom Jane is very close. It took some time to make this decision – a decision not made lightly.
After helping Jane choose a successor trustee, it struck me that there are many living trusts out there with potentially unqualified trustees named in the trust document. You can’t just throw out the first name that comes to mind when naming a trustee. So, who can you trust with your trust? Here are a few suggestions to help you figure it out.
First, make sure you understand what role a trustee has in relation to the trust. We’re talking about a fiduciary, someone who owes a duty of the highest order to the beneficiaries of the trust. When property is placed in the trust, it must be given to the trustee, to hold in trust. So, in essence, the trustee holds legal title to the trust property. The beneficiaries of the trust hold equitable title. That means the beneficiaries get the benefit of the property held in trust. Legal title carries immense responsibility. Did you hear about the grandmother who stole $97,000 from her grandson’s trust fund? A grandmother. She gambled it away. And, did you hear about the grandson who stole $100,000 from his 89-year-old grandmother’s trust? Yep, that money started disappearing within two weeks of the grandson being appointed trustee. The moral of the story is to understand that you’re giving someone the keys to the kingdom. The person you choose needs to be trustworthy.
Second, you need to consider the property to be held in trust. Do you have rental property? High value IRAs? Collectible automobiles? The person you name as trustee should be able to manage the property held in the trust, so that, hopefully, the trust maintains its value over time. Your trust document will instruct the trustee how to manage the trust assets, but the trustee is given (and needs) some discretion in managing those assets. If the trust holds a collection of antique cars, what happens when a beneficiary suddenly needs an emergency distribution and the money is tied up in the cars? Your trustee needs to be able to ascertain and maintain a proper balance between liquid assets and those that are more long term, all while maintaining the value of the trust. That can be a tough assignment – meaning, your trustee should have good business sense.
Finally, in choosing a trustee, you should consider the relationship between the potential trustee and the beneficiaries. Beneficiaries may have competing needs and interests, not to mention personalities. The trustee must be both impartial and fair. This is extremely important if the trustee is also a beneficiary of the trust. In fact, a trustee who is also a beneficiary may be subject to higher scrutiny and supervision than a trustee who is not a beneficiary. The natural choice, though not always wise, may be to choose someone close to the beneficiary. I’ve recently read about a case in which a mother was named trustee of a trust for her daughter. Because the mother did not agree with the daughter’s lifestyle, she refused to make disbursements, even though the trust itself would have allowed the payment. The lesson here is to examine the relationship between your trustee and the beneficiaries – and be able to ascertain potential conflicts. You want a trustee who can rise above petty disagreements and be even-handed.
There are many additional factors, impossible to list here, to examine when choosing a trustee. Because it is such an important decision, you should take your time, talk with your potential trustees, and talk to your attorney. Once you know who you can trust, your choice will be clear.