Trustees often need to make problematic decisions in the process of trust administration. For example, trustees must decide on investment allocations and evaluate discretionary distributions for beneficiaries.
“Beyond tax and accounting responsibilities, there is a level of liability that trustees accept, which could result in the trustee defending a lawsuit. Also, there are personal service needs, such as managing care for elderly beneficiaries,” says Douglas McCreery, CEO and Managing Member, CM Wealth Advisors, who is also a business and estate planning attorney with over 35 years of experience. “These issues are challenging for a family member serving as trustee.”
When administration of a trust is intended to be a short-term process, it’s relatively free of risk to appoint a well-respected family member as a trustee. But when a longer trust duration is anticipated, potentially over several decades, a more structured trust design may be more suitable to a family’s financial and continuity goals.
Smart Business spoke with McCreery about trust oversight for longer planning horizons.
How are longer planning horizons affecting estate decisions?
People, generally, are living longer. Extended planning horizons, often over three generations or more, have made trustee selection more difficult and with more uncertain outcomes for the family.
When the estate involved is not complex, meaning the assets are identified and easily valued, and the principal’s intention is to distribute the assets outright and free of trust, then the expectation is for a short trustee engagement. But if the purpose is to perpetuate shared value of assets long into the future — for instance, if the family has a business that it wants to keep operating after the deterioration or death of the founder, or the family has financial assets that are not easily divided among children or should not be distributed free of guardrails — then the trust could extend over decades. In these cases, the decision maker must focus on how future trustees are selected, not just who is chosen when estate decisions are first made.
What are the options for selecting future trustees?
Banks are often considered for long-term trustee responsibilities. However, individual trust officers change and responsibility is passed to a new officer who lacks experience with the family’s needs. Bank corporate changes may substantially alter the character and quality of services offered, so a bank may not be the best selection for a family wishing for continuity in a trust’s management.
Often the choice is some combination of the person’s adult children. It’s difficult, however, to solely rely on these individuals to provide necessary services and resolve trust administration issues, which might arise 15 to 20 years in the future. Additionally, leaning on family members for this responsibility can often lead to family friction and disharmony, even litigation. Professional expertise can provide objective, useful counsel to surviving family members in these situations.
In cases of significant family wealth and/or a complex estate, a potential solution is a private family trust company. In this arrangement, a company is set up and controlled by the family alone that has trustee powers based on state statutory law. Although it has its own intricacies, it is a structure that provides long-term governance and perpetuates control beyond individual lifetimes.
What should be understood about a family trust company?
The family trust company structure is similar to a corporation, in that it has a board and committees populated with both professionals and family members to deal with distribution, investment, succession and other governance issues. It is well suited when there’s a concentrated asset and the family needs to keep ownership under one umbrella, or where financial assets are tied together in such a way that subdividing them could mean a loss of concentration and effectiveness of management.
For families with wealth, selecting successor trustees and the right trust architecture is a complex exercise requiring experienced professional input. The more careful thought families put into consideration of the potential issues during planning, the more likely there will be a successful long-term outcome. ●
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