The benefits of trust utilization in estate planning are well espoused these days. In the right situations establishing a trust can assist in probate avoidance, tax planning and asset protection for beneficiaries. However, often missed in these discussions is the dramatic effect that trustee selection can have on one’s family following death.
In most cases, a parent’s natural inclination is to name a mature adult child as trustee rather than utilizing a disinterested non-family member. The rationale behind this decision tends to be two fold. First, the parent’s tendency to grossly under appreciate the family harmony risk in naming a child (or children) as trustee. Secondly, parents tend to grossly overestimate the benefits that may be achievable by having a family member serve as trustee.
This is typically because parents view the future administration of their trust as a relatively uncomplicated family matter best left to family members. Unfortunately this view, more time than not, is misguided. The administration of a trust is a complex fiduciary matter that when coupled with the infusion of family dynamics can quickly turn divisive hindering both proper asset administration and grantor intent.
The reasons for this are extensive. Primarily, we are creatures of emotion. The grief over the loss of a parent can oftentimes overwhelm children and their spouses to the point where objectivity is lost. In such an environment, adult children often become indignant and harbor feelings of rejection by their parents’ choice to overlook them as trustee. Some parents will try to overcome this notion of favoritism by naming all or multiple children as co-trustees. Family members habitually perceive different administrative matters with varying levels of materiality. Many times one or two of the children are called upon to do a disproportionate amount of the administration thereby cultivating resentment towards the remaining trustees. In the event that an even number of children are named as co-trustees, administrative deadlock can occur requiring judicial intervention.
Notwithstanding family dynamics, administering a trust is far from a simple endeavor. Family members are generally less qualified than experienced third parties in complying with regulations governing trust administration. These requirements continue to grow in complexity and range from prudent investment decisions to knowing what disclosures must be made, or, conversely, kept confidential from the other family members. While children initially view a trustee appointment as a positive, this enthusiasm quickly evaporates as the burden of administering the estate manifests itself. Trustees must take on time consuming tasks such as assessing the size and composition of their parents’ assets, determining title, extinguishing liabilities, complying with tax filings, and making proper distributions to beneficiaries. Many times the family member trustee is expected to perform said duties for little to no compensation. When compensation is paid to the trustee it usually creates resentment among the other beneficiaries because the burdens of the trustee are typically underappreciated.
The growing complexity and maze of regulations in trust administration also subjects family member trustees to potential liability for unintended errors in trust management. Personal liability can be both financially and emotionally devastating to a family member serving as trustee. Not only is it disastrous to the family member serving as trustee, the remaining beneficiaries may be left in the lurch because the family member trustee does not have sufficient assets to compensate the aggrieved beneficiaries for their losses.
The simplest way to reduce the risk of family disharmony is by choosing an experienced and well-capitalized corporate fiduciary to serve as trustee. A corporate fiduciary will lend objectivity and will relieve your children of the administrative burdens highlighted above. The additional costs of having a corporate fiduciary serve as trustee are normally quite modest (typically around one or two percent of assets). Especially when compared to the potential costs of fiduciary errors, outside professional advice and legal fees, and family disharmony that can accompany the appointment of a family member trustee. When appointing a corporate trustee, parents can allow children to maintain control over the trust administration by granting them the power to discharge the current trustee in favor of new independent corporate trustee. If the children are unhappy with the administration they can make a change without incurring the burden and family strain that accompany a family member serving as trustee.
Often times the topic of family cohesion is not given its due attention in the estate planning conversation. When presented with a complete discussion of the pros and cons of fiduciary choices, it has been found that a large majority of clients will choose a third party over a child. Such a choice can go a long ways towards preventing family discontent that may linger for lifetimes.
John Thompson is a shareholder with Kennedy Berkley Yarnevich & Williamson, Chartered assisting entrepreneurs, families and farmers in the areas of estate and business planning.