Selecting the Wrong Trustee

“If you think its expensive to hire an expert to do the job, wait until you hire an amateur.”  Red Adair, famous oilwell fireman

Let’s face it, the selection of a trustee is pretty much the choice between either a professional or an amateur. Frequently an inappropriate individual is named as the trustee of a trust. This is because the trust’s creator resorts to the use of irrelevant selection criteria. Often selected is the oldest child, or the “smartest” child, or “my Uncle Ned, who is a retired accountant.” While a professional trustee could be named to that role, the trust’s creator usually believes that a professional trustee will charge a large fee, and by appointing a family member as trustee, the costs to administer the trust will be minimized. That may not be the case if the amateur trustee must hire professional help along the way.

The selection of the trustee is among the most important decisions in the estate planning process. As such, that decision should not be made in haste. Nor should the decision be based on irrelevant or emotional criteria. The choice of the most appropriate trustee can lead to an effective trust administration that results in the efficient distribution of the trust’s assets consistent with the trust creator’s wishes. The wrong choice of trustee can result in a mess, unnecessary fees and expenses, and multiple trips to the probate court to seek judicial direction, that ultimately erodes the wealth that the trust creator expected to be distributed to his or her family members.

Criteria: Selection criteria like the oldest child or the smartest child are totally unrelated to the duties and functions of a trustee. To rely on that kind of criteria is likely to result in selecting an inappropriate trustee. The trust creator seldom uses their child to handle their investments, or work as a mechanic on their auto, or provide routine dental work. Instead, he or she hires an expert for that specific task or purpose with their expertise directly related to the task at hand. When an individual is asked to select a trustee for their trust, they need to apply relevant criteria, such as an individual’s attitudes, skills, availability, and competencies when that selection is made.

Attitude: When attitude is considered by the trust’s creator, that means an attitude towards rules, obligations, and responsibilities, the most important of which is that a trust instrument is essentially a set of rules that the trustee must follow. Michigan’s law is abundantly clear that the trustee must administer the trust in accordance with its terms and purpose, and for the sole benefit of all beneficiaries. So too, the trustee must have an attitude that reflects thoughtful and deliberate decision-making, and not dismissive or impulsive reactions. Finally, there must be an attitude towards others, since a trustee must always act in the best interests of the trust’s beneficiaries and solely for their benefit, which requires that the trustee be sensitive to all beneficiaries’ needs (current and remainder beneficiaries).

Skills: A trustee’s ability to handle trust assets depends upon their life experience, awareness of risk, knowledge about assets and trust principles, duty of impartiality, duty of loyalty, principal and income allocation rules, and investment diversification.  In addition, a trustee must regularly communicate with the trust beneficiaries, voluntarily provide them with information about the trust and its assets, and keep accurate and complete books and records.

Availability: A trustee must have the time and attention to devote to the trust’s assets and beneficiaries. The trustee cannot reasonably administer the trust on Saturday nights when time finally becomes available in his or her busy week.

Competencies: Some factors to consider when naming an individual to act as the trustee of include the following:

• Can the individual responsibly handle money, investments, and finances, consistent with the prudent investor standard imposed by Michigan trust law?
• Is the individual careful with his/her own money?
• Is the individual cautious with his/her own credit?
• Does the individual manage his/her own savings, investment, and retirement accounts?
• Does the individual prepare his/her own tax return?
• Does the individual carefully maintain and insure his/her own auto, home, collectibles and other personal property?
• Does the individual have an orderly desk where everything is in its proper place and easily accessible when questions arise?
• Does the individual produce neat, written work?
• Does the individual use spreadsheets to record and track his/her own important financial information?
• Does the individual proofread before hitting ‘send’ in emails?
• Does the individual keep his/her own important information and papers in organized files?
• Does the individual only answer questions when asked, but seldom volunteers to give information?

Practical considerations: Other factors also come into play when deciding who to name as the trustee. In addition to requisite attitude, skills, availability and competencies, will the identified individual have sufficient time to devote to essentially take on the equivalent of a second job with the trustee’s responsibility to administer the trust, e.g., competing business, family and social commitments? Is the individual likely to be around, available and in good health to take on the trustee’s responsibilities when he/she is finally called upon to act?

Trustee fees:  Realistically, an estate plan and a trust’s administration as a part of that plan are always going to cost money, and those expenses are going to be incurred, no matter who is in charge of the trust. A professional trustee will certainly charge a fee for its services to administer the trust, just as will any lawyer, accountant or other financial advisor. The Michigan Trust Code authorizes all trustees to charge a reasonable fee, whether amateur or professional. While fees can vary from one professional trustee to another, the fees usually range between 1% and 2% of the value of the trust’s assets.

In-house or a la carte?: All trustees will have to maintain an investment account, open a checking account to pay bills, hire an accountant to prepare accountings and tax returns, hire appraisers to value assets for tax reporting or implement “equal share” distribution directives, create periodic reports for the trust beneficiaries, file tax elections, and probably hire an attorney to provide guidance on topics like creditor claims filed against the trust, entitlement to family allowances, and state-specific homestead and spousal elective rights rules, just to name a few. A professional trustee will normally have in-house expertise to handle all of these tasks that an individual trustee will have to pay outside advisors for, a la carte. Practically speaking, naming “Uncle Ned” to act as trustee will often end up causing the trust to pay more than if the trust creator had just named the professional trustee to begin with.

Conclusion: While an individual trustee can at times be an appropriate choice, other times a professional trustee may be the best choice by far. Much is at stake if an amateur trustee is selected to administer a trust that may be expected to continue for several years. This important decision is more than just the attorney asking who the trust creator’s oldest child or smartest child is, or deciding a professional trustee is “not in the cards” by merely glancing at a professional trustee’s published fee schedule.

Hopefully, the estate planning attorney will help the trust’s creator to identify and focus on the relevant selection criteria when selecting a trustee. Naming a family member as the trustee usually means that an amateur will control and dispose of the trust creator’s hard-earned wealth, not a professional. That’s something to think about when a trustee is selected.