How To Select the Best Trustee To Manage Family Assets

Family business owners often use trusts to maximize the marital deduction and unified credit. Trusts also are used as estate planning tools to manage family assets upon death. These assets often include an ownership interest in the family business.

The selection of a trustee is important, not only to the well-being of the family in taking care of financial needs, but also for the future of family business operations after the owner dies.

There are two types of trustees: corporations and individuals. Typically, corporate trustees are financial institutions with trust departments that administer many trust documents. Individual trustees may be personal friends, business advisors or professional trustees schooled in investments or managing closely held businesses. Let's take a closer look at each.

Corporate Trustees
Corporate trustees have the advantage of being detached from family members, allowing them more easily to carry out their fiduciary duties in accordance with the law. Corporate trustees are not affected by personal relationships with beneficiaries or other family members.

In addition, financial institutions have years of experience in administering these types of trusts and can often provide the guiding hand that surviving spouses and family members need after the person in charge of the family's financial affairs passes away.

The disadvantages of selecting a financial institution as a trustee include a lack of personal relationship or grasp of what the family needs, an unbending dedication to fiduciary standards, and, often, no interest in or understanding of the business in which the trust may have a significant ownership interest.

Individual Trustees
Whether an individual trustee is a good or bad choice depends on the decedent's and the beneficiaries' needs. Trusted friends or financial advisors may be excellent choices if they understand the decedent's vision and want to meet the goals the family business owner sets.

Often an individual trustee can assist in running the family business and making management transitions. In addition, if the family wishes, an individual trustee may have more tolerance for holding assets the family wants to keep, without regard to maximizing income to the beneficiaries as a corporate trustee might.

On the other hand, individuals may pass away or decline to act as trustees, and the successor trustee may not be the proper person to administer the trust. They also may lack expertise in managing investments or running the family business. In addition, trusts usually have certain administrative requirements -- including the preparation and filing of tax returns -- with which a corporate trustee will generally have more experience than an individual trustee.

Selecting a family business member as trustee may create more conflicts than it would solve. If the family business member is a surviving spouse, giving that person trustee powers might trigger events that could lead to estate tax pitfalls.

Duties of Trustees
Trustees have certain duties and responsibilities, and can be held personally liable and be removed by the court if such responsibilities are ignored.

Here are the basic rules of conduct for trustees:

• Trustees must agree to serve. Trustees cannot be forced to serve, but once they have accepted the assignment, only the court or the trust's beneficiaries can release them from the liability.

• Trustees must abide by the terms set forth in the trust. They should also be familiar with any state laws that may confer additional duties, restrictions or powers of administration.

• Trustees owe a duty of undivided loyalty to the beneficiaries. They may not personally benefit from the trust or deal with the trust property other than to further the trust's purpose. If the trustees are in a conflict of interest with the beneficiaries, they must be able to prove to a court that they acted fairly and in good faith to the beneficiaries. If they are in a position of self-dealing, such as buying trust property, selling it to their spouses or selling their own property to the trust, they also must have received consent from the beneficiaries with respect to the transaction.

• Trustees must keep trust property separate from their personal assets. Commingling trust property with a trustee's personal assets potentially places the trust assets at risk. For example, if a monetary judgment is entered against a trustee in a personal lawsuit, the trust assets would be at risk.

• Trustees must keep accurate accounts and invest the trust assets prudently. Trustees will be held to the high standard of conduct of a prudent person. They must preserve the trust assets and invest them so that they are productive. If the assets are real property, they must provide for payment of utilities and taxes, make repairs, and insure and guard against fires and other losses.

• Trustees must deal fairly with all classes of beneficiaries. They may not invest in assets that favor one class of beneficiary over another, unless permitted by the trust agreement.

• Trustees have a duty not to delegate the full administration of the trust to another party. They may, however, be able to delegate certain functions to an agent or another co-trustee, and they can delegate functions such as those of an accountant, lawyer, real estate agent or stock broker, when appropriate. Trustees may delegate other duties if the trust agreement and state law so allow.

Don't Delay Selection
The only sure estate planning deadline is death itself. Consequently, many people postpone the process. Even when estate planning is a high priority, deciding on trustees is often taken lightly.

When selecting a trustee, be aware of the type of assets that will make up the corpus of that trust. Give serious thought to selecting the appropriate person or entity to handle your assets, including considering a person who will have the family's best interests at heart. Once the selection is made, check from time to time to ensure that circumstances haven't changed to require a different individual to be named.