When selecting a Trustee the most important qualities are honesty, stability, dependability, organization, financial experience, and ability to devote time and energy on an impartial basis for the benefit of all Beneficiaries. The Trustee is the most pivotal and critical part of any Trust Agreement.

THE CONCEPT OF A TRUST AGREEMENT

A Trust is a written contract between the Grantor and the Trustee for the benefit of all Beneficiaries which can include the Grantor and any one else he chooses including spouse, children, grandchildren, friends, or charities.

A Trust can be created during one’s life or by will upon death. A trust that is created at death by virtue of a will, is referred to as a Testamentary Trust by the “Testator" (the dead guy). A Trust created during the life of an individual is referred to as, the “Settlor," the “Grantor," or “Trustor." The Trust instrument is referred to as “inter vivos" formed during the life of its creator.

A Trust is an integral part of any estate plan for the purpose of avoiding the Probate Process, minimize the impact of taxation on the transfer of wealth from one generation to another or from one individual to another, or to protect against unwanted and unpleasant potential events like a lawsuit. A Trust can financially provide for a spouse, a minor child or children or yet unborn children, an incapacitated or disabled person, or for persons incapable of managing their financial affairs. A Trust must have enough provisions to adapt itself way beyond the life of the grantor(s) and the Trustee is at the center of the goals of the Trust creators.

Once a Trust is created, the Trust becomes the new legal titleholder of assets either transferred to the Trust, as a gift or as a sale. In order to avoid fraudulent conveyance, the individual giving up his legal right to possession or title and the right to own must in return receive equal fair cash value at the time of the transfer. Otherwise, it’s a “fraudulent transfer" to the detriment of all potential creditors or it’s a gift subject to a gift tax.

THE GIFT TAX ON TAXABLE GIFTS

The gift tax applies to the fair cash value given up at the time of the transfer (not the amount that was originally paid). Taxable gifts are reported on IRS form 709, taxable to the person giving up the right of possession by gifting his assets. The person receiving the gift (in this case the Trust) always receives the gift Tax Free. (Note: the person receiving the gift always obtains it tax free and the person giving the gift is always taxed on it unless it’s less than $12,000 per person beginning in 2006).

TRUSTEE'S POWER DERIVED FROM GRANTOR

A Trust can be revocable or irrevocable, grantor or non-grantor. Revocable is when the “Grantor" retains a power to “void" the Trust Contract. Irrevocable is when the Grantor “severs" all power of possession, the legal title to own the Trust. The concept of “possession" is the legal right to own and vested exclusively to the TRUSTEE. The Trustee’s power is derived from the Grantor(s) by a written agreement (Trust Agreement). The most important person is therefore the Trustee.

CONSEQUENCES WHEN GRANTOR NAMES HIMSELF TRUSTEE

If there is a provision in the Trust Agreement for the Grantor to name himself as the Trustee for his list of Beneficiaries, which includes himself, then he runs the risk of frivolous liability and harsh tax consequences, since he has elected himself the Pope by blessing himself and kissing his own ring.

FACTORS TO CONSIDER WHEN CHOOSING A TRUSTEE:

A true Trustee is an independent person not related to the Grantor(s) by blood or marriage or is an independent trust company, bank, or corporate body. The selection of a Trustee is the most significant part of any Trust Agreement.

When choosing a Trustee, several factors should be considered:

1. Location of the assets. Real estate, for example, has a definite location and the Trustee more familiar with the financial and tax implications of the property should be given weight.

2. The individual Trustee’s physical location (home address) in relation to the Beneficiaries.

3. The types of assets. Tangible or intangible, cash or near cash.

4. Relationship of the individual Trustee to the Grantor’s family.

5. An understanding of the intra-family dynamics of all the Beneficiaries.

6. Familiarity with financial management of himself and others he may employ.

7. The financial ability and level of experience with the assets entrusted.

8. If it’s a family business, the nature and familiarity of the business.

9. The willingness and vitality to serve as an impartial fiduciary.

10. The legal capacity to interpret and administer the agreement fairly to all Beneficiaries.

11. The willingness to accept the appointment and the willingness to accept potential legal liability from disgruntled beneficiaries.

12. Succession planning for a successor Trustee.

SOME BAD TRUSTEES

When choosing a Trustee that is intended to last longer than the life of the original Grantors certain types of Trustees may not be the best qualified to serve.

1. Corporate Trustees or Trust Companies. For the most part these types of Trustees are nothing more than business robots driven by numbers staffed by individuals who have no connection to the Grantors or the Beneficiaries. They administer the Trust assets but they lack the sensitivity of the people they are hired to serve. Generally they are very slow in responding to the needs of Beneficiaries and usually react in the interest of the Trust Company not their clients.

2. Banks as Trustees. They are too slow in making decisions, are ultra conservative, and always afraid to make decisions without first consulting their legal department. They have self-preserving motives and generally have no clue or understanding about the individual family dynamics of the people they are intended to serve.

3. Lawyers as Trustees. Lawyers are very up on the ins and outs of legal maneuvers and they have been trained to handle legal matters but generally have no financial experience or expertise in the management of assets. Even when they hire others in those financial roles, they are usually way too expensive and in some cases they make the assets their life’s insurance policy.

4. Accountants as Trustees. Accountants are good at keeping scores but generally lack visibility into the future. They have been trained to accumulate information but very tunneled visioned to make investment decisions. While there are notable exceptions to lawyers and accountants, generally they lack qualities to administer and provide full service or to take legal liability to serve as Trustees.

5. Family members as Trustees. It’s not a very good idea to have a family member become the Trustee of anything. The problem is mistrust. If you want to watch a family tear itself apart when it comes to money, especially with lots of money, you can go to family court or watch the Anna Nicole Smith’s made-for-TV drama.

SELECTING A TRUSTEE IS COMPLICATED

Selecting a Trustee can very complicated and you will not generally find individuals ready and willing to assume those fiduciary responsibilities, even when compensation is not an issue. Some Grantors have opted for co-Trustees and even Trust Protectors to ease the responsibility. See my article on “Trust Protectors." Generally Trustees are more willing to accept the position if they know that they have a back up for consultation with someone who is closer to the Grantor’s family.

Rocco and his team of bonded professional attorneys, CPAs and accountants help affluent individuals and companies retain control of their domestic and foreign/offshore assets, protect their assets, build & preserve their wealth and financially structure their money to reduce capital gains taxes, estate taxes, inheritance taxes, avoid the probate process and decrease income taxes.
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Rocco Beatrice, CPA, MST, MBA, Award-winning trust & estate-planning expert
71 Commercial Street #150 Boston, MA 02109 tel: 508.429.0011 fax: 508.429.3034
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