Individual Trustees: Top 4 Mistakes and How to Avoid Them
Whatever your connection with a trust, whether it is as an attorney, individual trustees, beneficiary, trust creator or financial advisor, you need to be aware of the top four mistakes that can derail financial goals and tear families apart. This article is based on the experiences of our trust company’s team members, now with more than 38 strong individuals. We have more than 150+ years of combined experience dealing with estates and trusts of all types and sizes.
Over the years, we’ve witnessed estates diminish due to taxes, legal fees, mismanagement, improper advice, and mistrust. One of the most important decisions in setting up a trust is choosing a trustee that can handle the trust’s affairs in the manner intended. When choosing a trustee your options fall into the following categories: Individuals, Corporate Trustee, or Team/Co-Trustees. This article will cover the pitfalls to be aware of when choosing an individual trustee and how to avoid them.
Trustee Mistake #1:
Not Talking About Compensation
Unlike corporate trustees, that have a published fee schedule, it is up to the individual to negotiate a reasonable fee for their trustee services. While some individual trustees may feel uncomfortable talking about money, it’s important to have the fee conversation up front.
The risk of not discussing fees up front is that years later when the individual trustee decides it is time to get paid, the end result may require court action. What sometimes happens is that a trustee will serve for a number of years at no fee. When it starts taking too much time/effort they will want to be compensated. Since the fee had not been discussed or taken before it can cause some issues with the beneficiaries. Sometimes even resulting in a strained or severed relationship.
Trustee Mistake #2:
Incomplete Reporting
There has been a dramatic increase in the number of lawsuits involving trusts and estates in the last ten years. Individual Trustees need to be aware of the responsibility, risk, and liability involved in their role. They are required to invest or oversee trust assets. While also preparing or coordinating tax returns for the trust and prepare accountings for the beneficiaries of the trust. They are also required to document all of their decisions. This includes explaining why they decided to deny or approve distributions from the trust. Failure to adhere to these responsibilities can result in the beneficiaries challenging the investments and/or distributions from the trust in court.
One example of an often-overlooked administration requirement comes up in the case of Individual Life Insurance Trusts (ILITs), where proper recordkeeping also means sending out Crummey notices each year. This notifies that a gift was made to the trust and informs beneficiaries of their withdrawal rights. Failure to issue these notices can have consequences, so it’s important for a trustee to maintain proof that the notices were sent.
Trustee Mistake #3:
Not Remaining Neutral
Individual trustees must be able to look past their own interests and follow the trust documents and instructions when making decisions about distributing funds. This can be difficult if the trustee is related to a beneficiary or has emotional ties to the family. For example, it may be hard to remain neutral in a situation where the trustee needs to decide if money from the trust should be used to fund a sibling’s real estate venture. One way to avoid this situation is by naming a corporate co-trustee. They will be able to look at the situation free of emotional baggage to help make a better decision.
Trustee Mistake #4:
Not Understanding or Adhering to the Fiduciary Duty
Trustees are required to manage the trust with the best interest of the beneficiaries in mind. Trustees are also subject to regulations like the Uniform Prudent Investor Act, which is designed to protect beneficiaries from inappropriate investment choices. This means that the trustees who invest and manage the trust assets can be held liable for investment losses. They can also be held liable for missed opportunities and profits that beneficiaries could have enjoyed if they had been more prudent with their investment choices.
Investment management is the most litigated area of trust administration. The process can be long and difficult and lead to significant trust assets being spent on legal fees. Make sure the person you choose as a trustee has the necessary skills to understand and meet the fiduciary requirements.
Why Use a Corporate Trustee?
A corporate trustee employs professional trust administrators who can be counted on to fulfill the obligations required of a fiduciary. This means a professional trustee can offer greater consistency and continuity of service than an individual trustee may be able to provide. A corporate trustee is also subject to many levels of oversight. These come from internal auditors, outside auditors, and government regulators—all for the protection of the trust beneficiaries.
Selecting the proper trustee is crucial. You want someone who will provide careful management of trust assets, exercise the appropriate level of diligence when executing the trust maker’s wishes, and demonstrate the ability to put the interests of your beneficiaries first. Above all, you want a trustee who will build and maintain a relationship. They should connect with the client and his or her family over the many years required to administer most trusts.
To learn more send us an email at info@premiertrust.com or give us a call at 702-577-1777.