Introduction:
Most people use family members for their trustees for their family trusts. Usually, the surviving spouse is named the successor trustee to the deceased, then the children, either all of them or the one with most business/finance experience.
The rationale is simple. Why not have a family member who is familiar with all the dynamics in the family to occupy this important position? Also, won’t it save money to avoid the expense of a bank or professional to serve as trustee? After all, what the trustee has to do is follow the trust instrument’s instructions, correct? Anyone should be able to do that.
All the above is often true which is why most attorneys, without much thought, simply plug the names of family members into the trust instrument they draft, and their clients are satisfied.
The problems, however, are manifold and without careful thought and planning, such a structure can tear the decedent’s family apart. Like so much in life, if all goes well it works well but if anything goes wrong, it can lead to disaster. It may be best to have multiple trustees who can bring in the professional and impartial advice if decisions have to be made that are likely to cause tension within the family. It may be best to have an impartial trustee appointed whose decision cannot cause additional stress between siblings or generations.
This article shall discuss the pros and cons of using only family members as trustees and make recommendations as to how the person creating the trust can maximize the benefits and limit the liabilities in trustee selection.
Family Members as Trustees…Pros and Cons:
The Basic Role of Trustees:
The purpose of trusts is discussed in other articles on this website and will not be repeated here. The trustee occupies a fiduciary position to the beneficiaries of a trust and thus faces the highest duty known to law as well as personal liability if that duty is violated. As stated elsewhere on this site,
Note that the fiduciary duty is one way: only the Trustee has it and has it both in terms of the relationship with the Trustors and the Beneficiaries. And that is true when the Trustee operates a business for the trust, sells assets of the trust, or interacts with the trust. This high duty is not only personal but is extremely dangerous for a Trustee to ignore.
The most common error of a Trustee is to engage in a conflict of interest. Put simply, that means the Trustee engages in a transaction in which the Trustee or someone in the Trustee’s family benefits to the detriment of the Trust. Commonly, this is some type of business transaction or sale of asset or access to Trust assets.
It can be far from black and white. Assume a Trustee hires his wife to do the bookkeeping for a business run by the trust. If she performs adequately and is paid fair market value, the odds are good that no court would find that a conflict of interest. However, if she is not qualified, creates erroneous books and/or is paid above the going rate, that could be a conflict of interest with the Trustee and a violation of the fiduciary duty.
The best method is for the Trustee to make sure all beneficiaries are aware of that type of transaction and to address any concerns they may have. All too often, the Trustee becomes irate at the suggestion of wrongdoing, cuts off communication, and anger builds on the part of the Beneficiaries. That is when lawyers are likely to come into the picture.
One Trustee put it to the writer well. “If objections are heard, no matter how subtly put, I take time to truly decide if there is cause. If there is any chance there is, I change my method, even if I am convinced, I am right. I’m the only one really at risk-I’m the fiduciary. If I am found to be wrong, I face liability. If the Beneficiary is found to be wrong…they face no liability. No brainer…”
Thus, the person appointed by the trustor (the person making the trust) to occupy the role of trustee is actually assuming a risk and burden. Many trustors think it is a complement. Perhaps. But it also is a high duty that can impose personal liability on the person or persons selected. It gives power: it also gives risk.
And what are the actual duties of the Trustee? Again, from another article on this website:
Basic Duties:
The duties of a Trustee may vary from state to state, but in general, a Trustee's duties include the following:
1. The Trustee has a duty to carry out the trust in accordance with the terms of the trust or will.
2. He or she has a duty not to delegate the Trustee's duties to another person-any duty which calls on him to exercise skill and judgment cannot be delegated, such as investment responsibilities. This duty does not prohibit him or her from hiring professional experts to evaluate the investments for their suitability to the trust.
3. He or she has the duty to exercise a reasonable degree of skill and care when managing the trust assets.
4. He or she owes the highest duty of loyalty to the beneficiaries to administer the trust solely in their best interests and put aside his or her own self-interests. No “conflicts of interest” are allowed at any time and full disclosure of any potential conflicts of interest must be made.
5. He or she has a duty to possess, protect, and preserve the trust property. He or she must also defend the trust and the beneficiaries against anyone who would challenge the validity of the trust or seek to claim trust assets.
6. He or she has a duty to separate and set aside the trust property and is required to keep the trust property separate from his own property. If the Trustee should co-mingle his property with the trust's property, he or she is liable for any losses that could result from the co-mingling.
7. He or she has a duty to make the trust property productive. He or she must act in a prudent, or sensible manner when it comes to investing, acquiring, selling, and managing the trust property. Appropriate tax planning for both the Trust and the beneficiaries is part of this duty.
8. Depending on the terms of the Trust instrument, the Trustee normally must file with the Court an accounting, often every year, indicating income and outgo and status of all assets…
9. Finally, the Trustee has the duty to treat all of the beneficiaries impartially. He or she must not favor one beneficiary over another. If he or she is unable to remain impartial and exercise his or her Trustee duties in good faith, he or she may be liable for any harm against the beneficiary.
The Trustee is entitled to fees approved by the court or specified in the Trust (or based on a court schedule) and even extraordinary fees if particularly unusual duties are imposed, such as operating a business. The Trustee can purchase fiduciary insurance which may protect the trustee from some liabilities, but such insurance will not cover breach of fiduciary duty involving intentional wrongdoing.
Who is a Good Trustee? The Problem of Time Passing.
The above description of duties makes it clear that the obligations imposed are not easily met by many people. You need a dedicated, intelligent, duty oriented and, if a business is involved, business savvy person to be the trustee. You need someone who can either understand financial documents and perform an accounting or retain professionals who are experienced and knowledgeable about the duties and can assist him or her to perform them.
Above all, you need a trustee who understands the wide fiduciary duties imposed. Such duties are not obvious to all. And those duties may last decades…or longer.
An example from our practice may suffice to illustrate the problem.
A family property in the Sierras was unique in its beauty and encompassed thirty acres with a lake and three comfortable cabins. The father had purchased the property in the 1920s and his three sons had used the property with their families ever since. The father was long deceased, the property in a trust in which each of the sons was one of the trustees. One of the sons died and his two sons became successor trustees.
There were the usual problems of arguments about use and access and whether the families of the sons should be allowed use without the original sons being there (one of the children was a drug addict.) Those caused much friction in the family, led two of the sons not to talk to their nephews, but the trust staggered along with such recriminations being constant. Then one of the nephews suffered a financial set back and demanded he be bought out since the money could stop him from having to file bankruptcy. The other sons refused, and a court fight quickly ensued. The trust was poorly written, having been crafted in the mid forties with only vague wording about the land being used “for the family’s enjoyment.”
We represented one of the sons seeking to maintain the property and by the time we came into the picture the feelings had hardened into intense hatred. No one was using the property since they feared the other families might show up; the court fight was expensive and prolonged with the Judge, at one point blurting out that he could not tell what the trustor wanted fifty years ago when the trust was made and he would just have to substitute his own judgment for the trustor’s…which made all the parties very upset. The case dragged on for five years costing hundreds of thousands of dollars. The nephew claimed conflict of interest on the part of the other trustees and breach of fiduciary duty. Worried about personal liability, the surviving son trustees, now in their sixties, were in anguish. Eventually the nephews were bought out but only after the family was effectively destroyed.
The father had three loving sons who all enjoyed the land when he was alive. By making the sons the trustees without a method for resolving disputes that was fast and effective and a clear description of what use the land was to the family, he set up a situation that would sooner or later become dangerous to the family. He assumed that his surviving generations would act the same as his sons and that his sons would not face liability as trustees. But families and circumstances change. What was his gift of love became a poison pill for the family.
The problem is that trusts can last multiple generations. Consider. You leave ten thousand dollars to your son and, if he does not survive you, to his children and if one of his children die before reaching 21, the money will be held for the grandchildren. Assume your son predeceases you. Assume one of his sons dies before 21, thus his children inherit when they are 21. You are now speaking of that gift going to the grandchild in sixty or seventy years and the ten thousand will be worth hundreds of thousands of dollars or more.
When you create a trust and pick your trustees, do not think in terms of three or five years of trust administration. Realize that you are creating a document that may alter the lives of generations who will not be born until thirty years after your death! And the trustees you name will be dealing with people and problems unknown to you. Indeed, perhaps inconceivable to you. And the trustees will die or resign, and you need successor trustees as capable as the first trustees.
That trust created in the forties could not have considered the effect of the opportunities available for children, grandchildren and great grandchildren. It was long before the computer revolution. It was created before the Cold War. Back then, segregation was still legal and Stalin the leader of Russia. Trusts you create today may have a beneficiary going to school on Mars. Your wording must take that into account. And your selection of trustees must take that into account.
Family Members as Trustees:
Normally, the bond of family is the strongest possible bond. A trustee who is a family member will normally wish to be fair and do right by the family beneficiaries. They know the family dynamics, know the family history, and probably know the wishes of the trustor better than anyone. Their role as a trustee will combine with their role within the family.
But what happens if a decision has to be made in which brothers or sisters disagree? What happens if a grandchild marries badly and his or her family are disliked by the rest of the family but seek additional access to trust assets? What happens if one child becomes a drug addict, needs the trust to pay for his or her care and livelihood, but the rest of the family think it is unfair to only support that child?
The issue is not that such decisions have to be made: the issue is that the trustee making the decision may make enemies of the rest of the family leading to the family breakup that most trustors are anxious to avoid. And past family dynamics may alter the logic of the decision. The writer well remembers a discussion between two sister Trustees as to the cost of college of one of the grandchildren and one of the trustees blurted out, “Mom already spoiled you and your family. You just have to go to a school as bad as the one I was forced to go to.” She burst into tears.
There is a role for a family member. But as one elderly client told the writer, “When the rubber hits the road, I want someone who is not emotionally invested to have the deciding vote…and take the blame.” He created a three-trustee structure with a bank as the third trustee and his daughter and son as the other trustees. It worked.
The value of a bank is that it is a permanent institution and will not die. The disadvantage is that they charge a fee, the actual employee assigned to watch the trust may leave, and that they will care little about the family nuances. Thus, also having family members is vital to counteract the institutional blindness of the financial institution.
Lawyers, CPAs, business associates or family members who are not beneficiaries can also occupy the role otherwise given to a bank, but fees may be charged, and you have to consider what happens when the lawyer or CPA retires or moves away.
Clear Instructions:
In addition to having an uninvolved tie breaker as one of the trustees, another and additional solution is to create wording in the trust to give guidance to the trustees in some detail. In the example above, if the trustor had said he wanted the property held in the family for generations and not to be sold for the benefit of any single beneficiary, there would have been no fight…and likely no blame within the family.
It is a balancing act on such instructions. Going into too much detail can make the trust inappropriate for the family. (One client wanted his great grandchildren to go to college in his county. He was shocked when we explained that they would not have that decision to make for up to forty years and by then they might want to attend college on the moon or in space. He paused, laughed, and simply said they should go to college wherever they want but not spend more than X in today’s dollars.)
The more instructions you give to the trustees in the instrument, the less fighting is likely down the road and the less acrimony between beneficiaries and trustees. As one client put it, “I’ll take the blame for the restrictions in the trust. I’m dead, so they can blame me all they want, and I won’t know or care…”
Be Realistic:
You don’t know the future and you don’t know who will actually be in your family or influencing it. Your grandchild may marry someone who is a predator. Your daughter may be injured in a car accident and not in sound mind. The nation may suffer massive inflation or a depression or a war or all three. How your children or grandchildren treat you may not be how they treat each other when you are no longer in the picture. You are creating a document that may be influencing lives in a hundred years and you are gazing through a glass darkly.
That’s why you need to carefully craft your wording and your selection of trustees. It is not simply plugging in your children or your spouse or Uncle Ned who is twenty years older than you and is unlikely to be there when most needed. You need to think it out.
Consider the following two wordings, both of which we have seen in trusts not prepared by us:
“I wish my trustees to take care of my grandchildren fairly and do what is right to assure a good life.”
That says nothing. It allows for conflict and confusion. Now see the following:
“I instruct my trustees to provide for the necessities for my grandchildren so long as they are pursuing a college degree but upon graduation or five years after beginning college, whichever first occurs, I instruct them to only provide for my grandchildren if for reasons beyond their control they are unable to provide for their own necessities of life and under no circumstances is any grandchild to receive more than 35% of the Trust Corpus as it then stands. Upon a grandchild attaining the age of thirty, the sums allocated to him or her will be distributed outright.”
You may agree or disagree with the specific instructions. But the trustees are given clear guidance, the room for dispute is minimized, and the goals of the trustor clearly spelled out.
Conclusion:
Planning for your own death is not pleasant and sitting down and trying to determine what is best for your family decades hence is difficult. Suspecting your children or grandchildren of perhaps not doing the best thing is even more unpleasant and there is a tendency to simply evade the issue and “trust them to do the right thing.”
They probably will. But if they do not, the family you love may self-destruct. You can minimize that risk by some careful planning now and by avoiding the easy route of passing the buck to the next generation.
That same elderly client mentioned above wrote an e mail which put it well:
“It’s my money and I want it to help the family. But it’s also my responsibility to give it in the right way so I don’t hurt the family. I understand that.”
He was right.