One of the most important decisions
when creating a trust in a will or a
stand-alone document is who to name as trustee. The decision often starts
with whether to name a nonprofessional (a
family member or a friend) trustee or a corporate trustee. While it is comforting to
have friends or family members act as
trustees because you know and trust them,
they are often unskilled in managing trusts.
Corporate trustees, on the other hand, are
trained in the nuances of trust accounts
and will probably be around for a long
time. They charge a fee, but, at the same
time, they are not likely to let emotions
influence their decision-making, like a family member might.
“Being a family trustee can be an enjoyable and rewarding experience, but
trustees need to be aware of their responsibilities and, more importantly, stay on top
of the rules and regulations concerning
trusts and estates,” says Carol Cantrell, a
shareholder of Briggs & Veselka Co.
Smart Business spoke with Cantrell
about family trustees and the top things
they need to know in order to properly
manage estates.
Of what laws should family trustees be particularly aware?
A hot topic today is the Uniform Prudent
Investor Act (UPIA), which has been
adopted by about 46 states. It requires a
‘modern portfolio theory’ or ‘total return’
approach to the exercise of fiduciary
investment discretion. This approach
allows fiduciaries to utilize modern portfolio theory to guide investment decisions
and requires risk versus return analysis.
Thus, investment performance is measured based on the entire portfolio, rather
than individual investments.
More specifically, the UPIA requires the
trustee to diversify the trust’s investments,
unless the trust agreement specifies otherwise. No category or type of investment is
inherently imprudent. Instead, suitability
to the trust account’s purposes and the
beneficiaries’ needs is the primary determinant. As a result, junior lien loans, investments in limited partnerships, derivatives, futures and similar investment vehicles are
not imprudent per se. But while the fiduciary is now permitted to develop greater
flexibility in overall portfolio management,
speculation and outright risk-taking is not
sanctioned by the rule either. For that reason, a fiduciary is encouraged to delegate
some or all of its investment management
functions if prudence dictates.
What are the trustee’s core responsibilities?
Trustees must remember that they hold
title to someone else’s assets, and they
must carry out the instructions in the trust
agreement. They cannot mix trust assets
with their own — they must keep separate
checking accounts and investments and
may not use trust assets for their own benefit. Trustees must treat all trust beneficiaries impartially.
What else does a family trustee need to consider?
The trustee should review the will or the
trust agreement for any special instructions given by the settlor, or creator. Did
the creator want the trustee to be aggressive or hold onto assets? What kind of
investment strategy did he or she suggest?
Another consideration is assets that may
have emotional significance, such as a
ranch that has been in the family for generations. A trustee may be tempted to sell it
in order to diversify. But, the trustee must
temper that decision with the asset’s special significance to the family and a host of
other factors, including the impact of
taxes, inflation and the special concerns of
the family. Trustees also need to keep
books and records, file tax returns, report
to the beneficiaries and control costs.
One of the trustee’s biggest challenges is
balancing the competing interests in the
assets among the beneficiaries. For example, a trust agreement may require the
trustee to pay all the current income to one
beneficiary, typically the surviving spouse,
and pass the remaining assets to another
group of beneficiaries after the primary
beneficiary dies. Thus, remaindermen are
‘waiting in the wings’ for what’s left when
the income beneficiary dies. The remain-dermen typically favor investing the trust
assets for maximum growth and minimum
current income. However, the current
income beneficiary prefers high income
producing assets, such as corporate bonds
that have limited growth potential. Striking
a balance between the two classes of
assets and beneficiaries can be difficult.
When is it a good idea to hire a corporate
trustee?
A good rule of thumb is that estates under
$1 million in assets can safely invest in
mutual funds without a professional adviser or trustee. But when a trustee is responsible for larger sums of money, professional help is highly recommended if the
trustee is not experienced in investing. In
addition, naming a professional trustee
may be wise when litigation is imminent,
such as when a will may be contested.
CAROL A. CANTRELL, CPA, JD, CFP, is a shareholder of
Briggs & Veselka Co. Reach her at (713) 667-9147 or
[email protected].