Best Practices for Selecting Personal and Institutional Trustees
While the process of selecting the best trustee for your assets can lead to some sleepless nights, selecting the wrong trustee can lead to litigation if the trustee performs poorly and/or does not want to be replaced later on. Before you set about selecting a trustee, ask yourself whether you want a personal trustee or an institutional trustee. If you are unsure, here are some basic guidelines that will significantly improve your chances of selecting the right trustee(s); and of having peace of mind with your decision without tossing and turning at night.
One of the main advantages of choosing a personal trustee is that you can select a person whom you know and trust. If you name a personal trustee and two successor trustees, you can be pretty confident that you will know who your beneficiaries’ trustees are going to be for quite a long time. Further, the trustee(s) may already know, or get to know, the beneficiaries very closely. This familiarity will allow them to make thoughtful, personal and well-informed decisions about the beneficiaries’ financial needs in a way that reflects your values.
One of the disadvantages of using a personal trustee is that unlike an institutional trustee, a personal trustee does not enjoy perpetual life. Therefore, if you select a personal trustee you may want to name both an initial trustee and one or more successors. Regardless of when you name successor trustees, be sure you establish a process for selecting successor trustees.
When selecting a personal trustee, be sure that you are as confident in their capacity to work with your beneficiaries as you are with their investment acumen. After all, they will be responsible for managing the assets in your trust, and they may have that role for quite a long time.
When relying on personal trustees it would also be wise to explore whether your fiduciary will have errors and omission insurance.
Institutional trustees, unlike personal trustees, are supervised by state and/or federal banking authorities, and have perpetual life. Historically, some asset owners have taken a set-it-and-forget-it approach to institutional trustee selection. This is based on the assumption that the institution they pick will be in business, and serving their beneficiaries, for as long as the trust exists. This type of complacency can be comforting; however in our world of endless bank consolidation, the belief that the institutional trustee you select today will have a perpetual life is a shaky proposition. Stories of families who selected an institutional trustee that was subsequently swallowed up by a vastly larger and remote bank are legion, and not universally favorable.
From a management perspective, there is some question as to how carefully bank examiners attend to the day-to-day workings of trust departments (beyond wonton malfeasance and fraud). Asset owners are comforted by the idea that banks (in most cases) have substantial capital reserves and are generally not judgment-proof. That said, institutional trustees are not immune from making a wide range of mistakes while acting in good faith. An institutional trust officer may also take a new position, different responsibilities or leave the organization. This could potentially shake your confidence in finding a replacement who is equally knowledgeable with your family’s financial affairs. If you would like to learn about an unfortunate incident resulting from inadequate trustee replacement terms read “A Family Loses Its Faith in Trust” in the Wall Street Journal, March 22, 2012.
Guidelines for Trustee Selection
Here are six (6) guidelines that will significantly improve your chances of selecting the right trustee for your assets and apply to most situations:
- Get to know well your trust officer and your trust officer’s successor(s). For some reason this word of caution seems more obvious to asset owners when selecting a personal trustee than an institutional one.
- Be sure you understand the terms under which you and later your beneficiaries can replace your trustee(s). Read the terms with care, have your counsel review them with you, and have members of your family understand them. Negotiate the terms until you are absolutely sure that they are exactly what you and your family need.
- Make sure that a so-called change of control (or sale) of an institutional trustee is an event in which you will have the right to replace your institutional trustee. For a personal trustee, you should have a replacement-right based on his or her diminished capacity.
- Do not allow a situation to evolve in which a large number of persons, beyond you and a small number of your direct heirs, must agree upon the replacement of a trustee.
- Be sure that trustee replacement terms apply equally to both the first trustee and successor trustees.
- Consider having co-trustees, one personal and one institutional, each with its own succession process.
If you are interested in a more sophisticated discussion about trustee selection and succession here are three more considerations:
- For larger trusts, you may want to consider assigning roles to individual trustees based on their area of functional expertise in, say, investments, administration and custody, and discretionary distributions to beneficiaries. You may also consider assigning roles to trustees based on their ability to supervise, manage (and maybe eventually sell) a concentrated legacy asset.
- You may want to consider having a protector, an individual who is not a trustee, but who can replace a trustee. Protectors have long been used outside the U.S. and can greatly streamline the trustee succession process. For this reason and others, they are increasingly being considered in U.S. as a part of the trustee succession planning process. If you decide to use a protector, be sure it is someone in whom you have a great deal of confidence since that person has a powerful role. Then too, there is the matter of successor protector planning.
- Lastly, you may want to create your family’s own private trust company in one of several favorable jurisdictions such as Delaware, South Dakota, Alaska and New Hampshire. This undertaking is not for the faint of heart. It is typically only suitable for families with substantial resources who plan to have their assets managed on their behalf for many generations.
If you would like to share your experiences (good and bad) about trustee selection and succession, I would like to hear from you. Please drop me a note or ring me at 617.945.5157.