Choosing the Right Trustee

“Many forms of conduct permissible in a workaday world for those acting at arm’s-length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is the standard of behavior.”

Meinhard v. Salmon, 249 NY 458 (1928) (Cardozo, J.)

The selection of a trustee is critical to the success of an individual’s estate plan (as well as their disability plan when their trust holds assets.) Often individuals initially opt to name their spouse and/or their adult children to serve as trustee of their trust without giving much thought to the role and responsibilities that a trustee assumes. More often than not, that individual is either oblivious to family dynamics that could impact their trust and its efficient administration, or they do not fully understand the fiduciary duties faced by a trustee.

Under Michigan’s Trust Code a trustee must administer a trust in good faith and in accordance with the trust’s terms and purposes, and the interests of the trust beneficiaries. These duties are mandatory and cannot be eliminated by the terms of the trust instrument, nor can they be blissfully ignored by the named trustee. Good faith on the part of the trustee is not a defense against a claim of disloyalty. Moreover, it is not necessary that a trustee gain from a transaction with regard to the trust, or the trust’s assets, or that the trust beneficiaries were financially damaged, in order to find that the trustee breached the fiduciary duty of loyalty to the trust beneficiaries.

Some (but not all) of the legal duties imposed on a trustee in Michigan include the following:

To act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests;
To invest, manage and diversify trust assets as a prudent investor would by considering the purposes, terms, distribution requirements, and other circumstances of the trust, satisfying this standard exercising reasonable care, skill and caution;
To take reasonable steps to take control of and protect trust property;
To keep the trust beneficiaries reasonably informed about the administration of the trust and the material facts necessary for the beneficiaries to protect their interests in the trust;
To promptly furnish to the trust beneficiaries a copy of the trust instrument;
To file annual tax returns; and

To send to the beneficiaries of trust income or principal at least annually, and at the termination of the trust, a report of the trust property, liabilities, receipts, disbursements, including the sources and amount of the trustee’s compensation, a listing of the trust assets and, if feasible, their respective fair market values.

With these many responsibilities and the high standard of behavior expected of a trustee, an ideal trustee would be one that would be: willing, available, reliable, responsible, organized, responsive, financially stable, emotionally stable, able to ask questions if uncertain, able to follow directions, be honest, be trustworthy, and be detail oriented.

When individuals consider naming their adult children as the successor trustees of their trust, they should ask the following questions of themselves:

Do my children get along with one another?
Do my children get along with each other’s spouses?
Do my children’s spouses get along?
Are my children able to work together?
Do my children communicate regularly?
How would my child react to a sibling who manages and distributes assets?
Are my children financially stable?
Are my children in financially similar situations?
Can I foresee a child demanding his or her inheritance immediately?
How would a react to a sibling receiving compensation for managing and distributing trust assets?
How would my child react to a sibling having a position of power over them?
Does my child have time to fulfill their fiduciary responsibilities as trustee?
Does my child have the financial and personal skills needed to administer the trust?
Is there a family friend or business party that all of my children respect?
Does my child considered as the trustee possess a sense of my morals and values?

No general rule exists for when an individual is better suited than a corporate or professional trustee and vice-versa. However, a professional trustee may be more appropriate when: (i) there is a blended family of spouses, children and step-children, or mixed children from different parents; (ii) the trust estate is comprised of complex assets like a closely held business, real estate, mineral interests, collectibles, or intellectual property rights (like copyrights or royalties); (iii) the assets are to be held in trust and distributed over a long period of time, such as a dynasty trust that is intended to reduce future federal estate or generation skipping transfer taxes; (iv) trust assets are spread over many different jurisdictions and subject to different tax laws, e.g. inheritance tax exposure; (v) assets are to be held in a supplemental needs trust for a disabled beneficiary who receives governmental benefits; (vi) some level of dysfunction exists among trust beneficiaries, where a professional trustee will allow family members to continue to be family members, without placing one family member in a position of power over another; and (vi) significant tax considerations exist based upon the value of the gross estate and/or substantial lifetime gifts have been made that complicate the calculation of federal estate taxes.

An unambiguous estate plan that details an individual’s wishes for the administration and distribution of his or her estate can go awry if the trustee does not abide by the terms of the trust instrument, does not pay attention to the detailed legal responsibilities imposed on all trustees, goes on a ‘power trip’ over the trust beneficiaries, or breaches his or her fiduciary duties, whether intentionally or through their misinterpretation of the trust. The selection of a professional trustee that possesses the experience and that possesses the time and talent the to carry out these duties can go a long way to ensure the success of an estate plan.

You are encouraged to take a look at the most recent Greenleaf Trust client satisfaction survey results to gain a sense of how Greenleaf Trust fulfills these many fiduciary duties and responsibilities.