James A. List, Esquire
The Law Offices of James A. List, LLC
What is a trustee? What do they do? What are their qualifications? Who should we use?
These questions and many similar ones often fill up estate planning appointments. The need for qualified trustees continues to grow for many reasons. Families with disabled members need to provide special needs supports without impacting disability benefits. Family structures have changed, and trustees are necessary to protect second spouses and to protect children from previous marriages. Some trusts are critical for estate tax planning.
Trusts have three parties – the grantor, or the person creating the trust, the trustee, or the manager, and the beneficiaries. Trustees are fiduciaries – they owe a duty to the grantor to carryout his/her wishes. Trustees owe the beneficiaries of a trust a duty of care. What does this mean?
Trustees have to manage the assets that are entrusted to them. If it is commercial real estate, they need to preserve the property, collect the rents and maintain appropriate insurances. If the assets are cash or investments, they need to be prudently invested based on the criteria set forth by the grantor.
Trustees need to protect assets. If a squatter trespasses on trust property, the trustee needs file suit to evict them. If there is a dispute about a property boundary line, the trustee is obligated to research and advocate on behalf of the trust. If the investments are not performing, they need to be changed.
Trustees have to comply with federal and local laws. Trusts, like corporations, are persons in the eyes of the law. Federal and state tax returns need to be filed annually. For some types of special needs trusts, annual reports need to be filed with Medicaid; some minors’ trusts require that annual reports be filed with a court.
Beneficiaries have rights under trusts. This includes access to information and rights to distributions of income (and sometimes principal). Beneficiaries have the right to be treated impartially. Sometimes, beneficiaries have the right to replace trustees under certain circumstances, such as becoming a certain age.
Trustees, in essence, have to be everything – attorney, accountant, stock broker, insurance agent, realtor and diplomat. That is why the selection of a trustee is sometimes so difficult, and why if it is not handled properly, litigation can ensue.
So who should you choose? There is no requirement that a trustee have all of the skills or backgrounds listed above. Even commercial trust companies delegate some of these functions to outside professionals. The key is that the trustee hires professional advisors in those areas where expertise is needed. If the main asset is stocks and bonds, then a financial advisor is needed if the trustee does not have that background. If tax assistance is necessary, a CPA will fill the need.
Knowledge of and communications about family dynamics is the other key ingredient in selecting a trustee. Trustees should meet with the grantor and the beneficiaries to establish lines of communication and set expectations. These interactions can be stressful, particularly when a parent informs their child that their share of the family estate will be held in a trust. This is preferred, however, to finding out after a death in the family that the financially savvy uncle everyone dislikes and distrusts will be in charge of the trust assets, or the brother-in-law you dislike will be managing a marital trust for your benefit. Avoiding surprise is the key to preventing costly and divisive litigation.
The selection and process for replacing trustees is one of the most important decisions in trust and estate planning. Discuss this issue at length with your team of professionals.