Selecting a Trustee for an Estate With a Family Business

Trusts are often used in even the most basic estate planning. Every trust has a trustee, and deciding who will serve in that capacity is often difficult. Here are the most common concerns of family business owners who are faced with choosing a trustee. While we cannot cover every situation in this article, we would be glad to discuss any concerns you may have about trustee selection.

Q:  What exactly is a trustee and what are his or her duties?

A:  A trustee is a person or entity with trust powers. The trustee holds title to property and manages the property for the benefit of beneficiaries named in the trust document. The beneficiaries may be family members, other individuals, charities or other entities.

Q:  What is the difference between an executor and a trustee?

A:  The major difference is that an executor’s job is typically short term, lasting from six months to a few years. A trustee’s job can extend for decades and in some cases, generations. Both marshal and administer the Trusts are often used in even the most basic estate planning. Every trust has a trustee, and deciding who will serve in that capacity is often difficult. Here are the most common concerns of family business owners who are faced with choosing a trustee. While we cannot cover every situation in this article, we would be glad to discuss any concerns you may have about trustee selection.

Q:  What exactly is a trustee and what are his or her duties?

A:  A trustee is a person or entity with trust powers. The trustee holds title to property and manages the property for the benefit of beneficiaries named in the trust document. The beneficiaries may be family members, other individuals, charities or other entities.

Q:  What is the difference between an executor and a trustee?

A:  The major difference is that an executor’s job is typically short term, lasting from six months to a few years. A trustee’s job can extend for decades and in some cases, generations. Both marshal and administer the

Q:  What if the trust owns assets, such as an interest in a family business, that are not performing well? How does the trustee handle investment performance in this case?

A:  Sometimes the trust document will provide that certain assets should not be disposed of or that the trustee need not consider the investment performance of certain assets. In these cases, the trustee ordinarily will not have fiduciary liability for not acting to dispose of the asset. Even where this is not specifically provided for in the document, the beneficiaries may be benefiting from the continued ownership of the asset and request the trustee not dispose of it. There will be cases however, where the trustee will need to be concerned and may arrange a sale of the asset, sometimes to the family member or beneficiary who really wants to keep it.

Q:  Is there any reason why family members, some of whom may be beneficiaries under the trust, cannot be trustee of the trust?

A:  In many cases, a family member can be trustee. But in some cases, it is not advisable to do so. In cases where the trust property is going to be included in the estate of a beneficiary anyway, making that person a trustee will not ordinarily cause any tax issues. In cases where the property is not intended to be included in a beneficiary’s estate, it is safer to exclude that beneficiary as a trustee. If this is unavoidable, be careful that the trustee’s powers be limited sufficiently to not require the property in the trust to be brought into his or her estate upon death. In addition, be sure the beneficiary/trustee in fact follows these restrictions in practice in administering the trust.

Q:  When would it be advisable to name a bank, trust company, brokerage house or other institution as trustee?

A:  Institutional trustees are used in many situations, such as when there is no competent or trusted individual available to do the job. An institution may be desirable when professional management of assets is desired, when individuals are afraid of fiduciary liability resulting from ownership of certain high risk assets, or there is conflict between beneficiaries. There may be complex tax issues that are best handled by an institution with the appropriate resources. In addition, institutions have theoretically unlimited lives. If the trustee job is expected to last for decades or generations, an institution may be the only viable selection for the job. 

Q:  Institutions are impersonal. How can I retain some control over them while still getting the advantages of their fiduciary expertise?

A:  There are several ways that some control can be maintained over institutions without impairing them in the performance of their duties as independent trustee. One way is to appoint a trust advisor to make certain decisions or override certain decisions of the trustee. The trust advisor is typically the trusted individual or family member who will bring a personal side to trustee decisions that will more likely comport with your wishes. A second way is to provide that you and/or the beneficiaries after your death may remove the trustee and appoint a new one if there are differences of opinion. Typically, the successor trustee is another institution of similar size. A third possibility is to appoint a trust protector who may remove and replace the trustee and/or amend the trust within certain parameters. The trust protector is typically an unrelated individual or group of individuals.

Q:  If an institution is used, how large should it be?

A:  In the past, it was typical to select the largest of institutions. With mergers and acquisitions in the financial services industry, many of these entities have become extremely large. This has opened the door for a new breed of trust company that is much smaller and offers the benefits of sophisticated management and personal attention. Many trust documents require institutions to be of a size that preclude the use of a small trust company. If you wish to keep the door open, you may want to require the institutional trustee selected initially or as a successor, to have $100 million under management as a parameter. This will allow the use of smaller entities without them being a shell company or a company that is not substantial enough to stand behind its work.

Q:  Is there any reason why I could not have co-trustees serve so as to take the pressure off one person or to get the benefits of both an individual and an institutional trustee at the same time?

A:  This strategy is used often by settlors of trusts. One of the co-trustees can even be a family member in cases where the other trustee is needed to make decisions that the family member alone should not make.

Q:  I would like to be the trustee of a trust I am going to set up during my lifetime. Is this possible and advisable?

A:  It is typical in states that allow it (and most do) for you to be the trustee of your revocable living trust during your lifetime.

This is because you have retained the right to revoke, alter or amend the trust at any time, and any property in the trust at your death will be included in your taxable estate. For trusts set up during your lifetime that are irrevocable and designed to remove the property from your estate, you should not typically be the trustee. This is because your retention of rights over the property in the trust or your ability to affect the beneficial enjoyment of the property may cause property you have transferred to the trust to be included in your taxable estate. Generally, this is not a desirable result.

Please call us for answers to other questions you may have about selecting a trustee, or other estate planning issues. We would welcome the opportunity to be of assistance.