As the word is defined, a trustee is a natural or legal person to whom property is legally committed to be administered for the benefit of a beneficiary. If an ad was placed in the newspaper for a trustee position, it might look like this:
Based on the above partial job description, how many of the people you might be considering would really be interested? Very few, right?
Is there anything else you should look for in a trustee? Besides honesty and good judgment, they should possess the following additional knowledge and skills:
The selection of a trustee should be a business decision, rather than an emotional one.
Take the case of fifty-year old Richard. Richard had a net worth of $5 million, most of it tied up in a closely-held business, and was concerned about the estate tax his heirs would have to pay upon his death. Being an intelligent businessman, Richard set up a $2 million irrevocable life insurance trust. In an effort to save money and use someone he knew and trusted, Richard named his business partner and best friend, Michael, as the trustee. Michael was honored that his partner had such confidence in him and gladly accepted the responsibility.
Richard paid the $30,000 annual premium for the policy in lieu of direct gifts to his three children, who were also his beneficiaries. Upon Richard's death, the IRS determined the trustee, Michael, had not sent "Crummey Notices" to the children; therefore, the $2 million death benefit was included in Richard's estate. Michael protested and claimed he had sent proper notification, but could not locate the records or prove the notices were received. A higher court denied Michael's appeal.
Now, instead of providing funds to pay estate taxes, the life insurance had caused Richard's estate to rise in value, thus increasing the tax liability by over $1 million. In a desperate move, Michael was forced to quickly sell the business at a substantial discount. In turn, Richard's beneficiaries sued Michael for breach of fiduciary responsibility. Michael was compelled to use his personal funds to finance his defense and eventually made a large out-of-court settlement.
What are some of the other potential pit falls of using a well-meaning friend or relative as your trustee?
So what should you do to avoid putting someone close to you into this unenviable position? Choosing a corporate trustee might be the answer.
Corporate trustees generally:
When choosing your trustee, keep the complete job description in mind. The bottom line is: a corporate trustee is generally a professional who has more time, experience, and resources to achieve better results than your Uncle Charlie or Aunt Mable.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.