Utah Bar Journal

Advising clients on the selection of this trusted fiduciary can be a twisty road, full of dangerous pot-holes, a road that clients expect their attorney to guide them through. As their trusted advisor, the advice we give clients on this decision can have very long-lasting effects on the clients’ fortune and their family.

After dad’s death a shelter or bypass trust was left for mother and the children, along with a QTIP trust for mother. Both mother and an institutional trustee were named as successor co-trustees of both trusts. Mother continued to use the trust assets for her benefit and for the benefit of their descendants (specifically providing for the higher education of her grandchildren). After a series of unfortunate events mother was unable to handle her own affairs. The family desired to continue using the trust assets for the benefit of the family in the same manner mother had used them. However, the institutional trustee was unwilling to act without safety nets, such as court approval, for every decision (presumably for fear of being sued) and roadblocked all of the distribution decisions the family made. Even in the face of a unanimously signed consent by the family authorizing the institutional trustee to act, the institutional trustee refused. After months and months of red tape and hassle, not to mention the mounting legal and trustee fees, the family fired the institution and replaced that trustee with another (as allowed by the trust) in the hope that the new institution would work with them and not against them.

Individual trustees also malfunction. In one example, the parents died leaving a son as the individual trustee. He gave a copy of the trust to his sister, a beneficiary, and explained his investment strategy as trustee. That communication constituted his sole report about the trust or trust assets. Over time, sister lost her copy of the agreement and did not remember any basic elements of his investment strategy. Brother refused to give her another copy of the trust agreement. He derided sister for not keeping investment strategies in mind. Brother refused to give her any accounting whatsoever of the trust assets or of trust transactions over the years. When informed of her rights, sister refused to consult an attorney or do anything else, because that “would cause trouble in the family.” As time passed, suspicion grew, distrust mounted and conflict within the family was the inevitable result.

Examples of challenges abound regardless of the trustee chosen. The question for us as estate planners is who should we advise our clients select as successor trustees and why? Typically when a revocable trust is set up the grantor or settlor is the trustee, serving with their spouse, if married, and then alone for the rest of the survivor’s life. This arrangement generally works very well. Problems typically arise after death (especially in a second marriage situation), during which time administration of the trust really begins, such as when property is no longer used for the benefit of the settlor but is to be distributed to or held for the benefit of the surviving spouse, the children, or other selected beneficiaries, and when tax returns are to be filed.

Role of Trustee
We begin by looking at the role of a trustee. A trustee is the legal owner of the assets transferred to a trust, charged with managing those assets in the best interest of the beneficial owner (the beneficiaries), which might include investing trust assets, management of real estate, management of a business controlled by the trust, paying trust expenses, and distributing trust assets. Such management is generally governed by the trust document and is not governed by what the beneficiaries want (regardless of the pressure the beneficiaries apply on the trustee).

Trust documents may leave great discretion to the trustee to manage and distribute the trust assets as they see best or may have strict guidelines the trustee must follow, but managing assets and making distributions are only the beginning of the job. The trustee must also do the following:

1. Collect and inventory trust assets;


2. Obtain fair market values;


3. Prepare and have ready accountings of trust assets (renewed annually);


4. Identify and locate trust beneficiaries;


5. Manage, protect, and invest trust assets;


6. Open trust accounts;


7. Open trust safe-deposit box;


8. Pay debts and expenses;


9. Insure the filing of tax returns and payment of taxes (IRS form 1041 and Utah State form TC-41);


10. Meticulously record all payments of compensation to the trustee;


11. Distribute remaining assets to the proper beneficiaries; and


12. Communicate frequently with trust beneficiaries.

In addition to the responsibilities a trustee must undertake, a successor trustee should also be careful never to do the following:

Under Utah Law, all but the duties to provide information and the fundamental obligation to act in good faith may be altered by the terms of a trust document. The basic duties and obligations of a trustee are outlined in Utah Code sections 75-7-813 and 75-7-814.

Selecting a Successor Trustee
The choice of a successor trustee usually comes down to an individual (related or unrelated), a corporate or institutional trustee (sometimes called a professional trustee), or some combination of the two. Institutional trustees may come in many variations such as, lawyers, accountants, or professional trustees working within a bank’s trust department or a trust company. Clients must consider many factors in the selection of a successor trustee, which include the size of the estate, the complexity of the required administration and distribution of trust assets, expertise or experience in financial matters, projected length of the corpus of the trust, and many more issues. The proper selection of a successor trustee can make the administration of the trust quite easy, but if the wrong selection is made the end result can be a reduction in trust assets, the trustees personal liability for breach of fiduciary duties, and years of expensive litigation.

Legally there are only a few requirements. A trustee cannot be a minor, a convicted felon, or a non-U.S. Citizen, but in today’s electronic world a trustee can serve very well even if they reside outside of the state where the trust is being administered. Unfortunately, the selection of a qualified successor trustee goes well beyond the basic legal requirements.

The Case for a Family Trustee
A family or individual trustee generally serves without compensation or is willing to serve for very nominal compensation (income from their duties as trustee is taxable income, where inheritance is generally income tax free). An individual trustee is motivated to get the job done quickly (no “red-tape”) and have everything go as smoothly as possible to avoid family conflicts and get their share of the inheritance as fast as possible. For many estates with relatively straightforward assets, such as a home, brokerage account and life insurance, and standard easy to follow distribution patterns, such as distributing equally to the children, an individual trustee can usually handle the job. Of course, the family dynamics and personality of the beneficiaries will better determine if a family trustee is capable of handing the trust. Advisors should be careful in suggesting a successor trustee based just on the monetary value of the trust.

Many settlors select the same person to serve as trustee as they selected to serve as personal representative of their estate. While certainly not a requirement, it can lead to a simple and more consolidated administration, but also removes the second pair of eyes reviewing the administration that may help all the beneficiaries feel more comfortable.

The Case Against a Family Trustee
The difficulties seen when an individual family member is selected as a trustee may include: (1) Lack of training, education, expertise, and experience in financial matters. Another common challenge for a family trustee is knowing how to act when the trust holds a controlling interest in the family business. (Does the trustee know how to run the business and make the decisions necessary to keep the business profitable?); (2) Lack of availability (serving as a trustee requires a great time commitment and most family members already have a full time job); (3) Lack of supervision and independent audits. Many embezzlements start with trusted people borrowing temporarily, with good intentions that mushroom out of control. Placing a family member or friend in such a position can be dangerous. A prospective trustee who is undergoing financial stress should receive extra scrutiny, just as a bank checks the credit history before hiring a teller; (4) Inherent conflicts of interest exist when a family member is the trustee and a beneficiary. Many times disgruntled relatives accuse a family trustee of stealing, cheating, or being unwilling to disclose financial information. The family member being accused spends countless hours working for the benefit of the family and may feel they are doing all the work for nothing while the other children are enjoying a free ride – which they are. Such conflict never ends well. Accusations are made, feelings are hurt, and relationships harmed. Blended families may end up with a step-mom or dad serving as trustee over the deceased parent’s children’s inheritance. Overbearing children may overwhelm a surviving spouse. Beneficiaries may need protection from themselves. These and other such issues of conflict can destroy family relationships and frequently do; (5) Individual trustees die (with their knowledge of how the trust has been administered) and need to be replaced; (6) Personal liability. Most trust documents have an exculpation of trustee clause which is enforceable under Utah Code section 75-7-1008, unless the breach of trust is committed in bad faith or with reckless indifference to the trust purposes, or the interests of the beneficiaries, or the trustee is personally at fault. See Utah Code Ann. § 75-7-1010 (Supp. 2008). That being said, the personal trustee must still defend themself against any actions brought into question by the beneficiaries and must deal with the emotional, financial, and mental stress caused by such claims.

Sometimes individual trustees believe the trust says what they want it to say. Recently a father died leaving mother as trustee of the marital and family trusts. Their children had stronger than usual claims for support from the family trust. However, mother used both trusts as her own personal funds, indiscriminately, as though the trusts did not exist. She denied assistance to a married son who needed re-training during an economic slump. The son could not bring himself to implement remedies he would have used against a corporate trustee. Blatant disregard for dispositive provisions gives reason to question whether other carefully crafted provisions will be re-read, understood, or implemented.

Most settlors believe their family will make the transition well enough. Experience instructs us that family dissonance can overwhelm and overreach the expected levels of grieving and transition and intra-familial hurts. A psychologist specializing in family transitions and their estates explains that extra intensity. He finds that children often keep their divisive animus capped during the lives of the older generation. Then, not dissipated, the tensions erupt after those lives, with bottled-up intensity.

The Case for an Institutional Trustee
Research indicates that an institutional trustee is generally the preferred choice. A professional has the expertise to put meaning into the words of the trust agreement; understand their responsibilities, and has a system and resources to fulfill the proper execution of the trustee’s duties. A good trustee can successfully handle a poorly drafted agreement, while a poor trustee can stumble with the most artfully conceived and well-drafted trust. A professional can handle complex assets and issues (typically involved with higher valued estates where much more sophisticated management is necessary). Other reasons an institutional trustee has great value include: (1) Objectivity: because there is not the inherent conflict of interest, institutional trustees are neutral to family problems and unwavering to family pressures. Frequently a settlor will choose a professional trustee specifically to repel the pressure family requests can put on a family trustee; (2) Time: professional trustees do not have another full-time job so they can devote all the energy to administration of the trust; (3) Institutions do not die (for the most part); (4) Professional trustees often have independent auditors and review committees to insure proper administration and accounting of trust assets. They also have access to experienced attorneys and advisors who can lend needed support; (5) Liability: using a professional trustee removes any potential personal liability from family members and puts that liability on the institution. Longer-term and difficult family situations argue for an institutional trustee.

The Case Against an Institutional Trustee
Cost is the biggest hindrance clients see in hiring an institutional trustee, but the old adage remains true – “you get what you pay for.” Other reasons clients may not like an institution are: (1) Red-Tape: institutional trustees have policies and procedures that must be followed before decisions can be made and action taken. These processes impact timeliness. Often, the institution’s legal team located in New York or Washington D.C. calls the shots and therefore removes the ability of the local trust officer, with whom the family has created a good relationship, to get the work done; (2) Complexity: an institution may create complexity in rather simple issues in an effort to make sure they are protected from any liability; (3) Conservatism, an institution can be extremely conservative in the actions they are willing to take. This can be a positive or a negative, depending on what the beneficiaries want to accomplish and what results occur; (4) Impersonality: many beneficiaries like dealing with a non family member because they are impersonal and “all business.” Nonetheless, corporate trustee/beneficiary relationships can evolve into cherished friendships. Corporations function through people and those people can care for people they serve. Beneficiaries can also come to care for the people who listen to them and help them. The company can change an assigned trust administrator if that relationship does not work well. Corporate trustees want satisfied, ongoing client relationships, for the relative ease of conducting business and to create financial relationships with remaindermen.

The Case for Co-Trustees
Another option is to use a combination of a family trustee and an institutional trustee. The institutional trustee carries the workload that the individual trustee is not trained to do such as tax returns, financial management, and to be the unbiased, non-emotional “bad cop” when family disputes arise, as they usually do. The family member can handle the interpersonal issues that are ever present in every family trying to divide up inheritance. Many times the family trustee can be granted the power to switch responsibilities between the family trustee and the professional trustee or delegate certain responsibilities to a professional. The family trustee with such ability is, as a result, better able to manage the control and accountability the trustee has to the beneficiaries, which may ease the worries the beneficiaries may have that the trustee has too much power and not enough accountability.

The Case for a Trust Protector or Special Trustee
Another very good option is to select a trust protector or special trustee, who acts as an unrelated, unbiased third party that does not have a conflict of interest and can oversee the trust as well as the trustees. This special trustee could determine fees, competency, and the emotional involvement of the individual trustee, while keeping red tape and bureaucracy of an institutional trustee at a minimum by retaining the power to remove and replace the trustees, terminate the trust, amend the trust for specific tax purposes (such as continued lifetime gifting after the settlor becomes incompetent to reduce the potential estate tax), or to protect a beneficiary (if the trust says make a distribution at age twenty, but the child at twenty is a drug addict, the trust protector, without a court order, could change that distribution requirement to age thirty, or whenever the child is free from drugs, while still allowing the trust to pay for the child’s treatment). Even more important the special trustee or trust protector could stand on the sidelines with the ever present threat to make a change if the trustees are unwilling to play fair.

Advising clients on the selection of a successor trustee is critical to the operation and success of the trust and may be the most important advice we can give clients in their planning. The best trustee must (1) have good common sense, (2) have impeccable integrity, (3) be fit in age and capacity to accomplish the purposes of the trust, (4) have or make the time, and (5) know or become acquainted with the beneficiaries.

We carry the burden of educating our clients about the relative merits and weaknesses of all types of trustees. We should focus a wary eye on existing and latent family dissonance as such discord generally is the biggest hurdle a successor trustee faces.

Generally, the worst-case scenario with a corporate trustee involves convenience, time, and fees, which may be resolved by legal representation or appointing a new fiduciary. Individual trustees, in the worst-case scenario, may jeopardize the entire purpose and corpus of the trust.

The role of a successor trustee is a job, and many times a hard one with large consequences on family assets and more importantly, on family relationships. Few friends or family members will consider trusteeship a reward when faced with the actual work itself, wondering whether work is done correctly, grappling with divisive issues and people, and carrying the weight of personal liability. The attached chart may assist clients in the selection of a successor trustee as it allows them to evaluate candidates and address the need for additional help in the areas where the desired trustee is weak.