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C. Choose Trustee arrangement

C. Choosing the appropriate Trustee arrangement

This decision deserves more thought than it often gets. Your lawyer can draft a document for you with almost any kind of conditions to guide, dictate or limit the use of Trust funds, but YOU need to find a party willing and competent to wear the hat of Trustee. There are two very different aspects to any Trustee’s job – managing the assets wisely from an investment point of view, and applying the funds as called for by the Trust.

In most families with living Trusts, the parents initially choose to be their own co-Trustees. This can work just fine. Frequently, Trust assets are uncomplicated, or consist largely of a family business. They are long term – not actively bought and sold. Ongoing professional investment advice might be unnecessary. If desired, the parents can consult a financial advisor initially, with periodic reviews. This arrangement gives the parents maximum, “hands on” control over the appropriate use of funds to meet the family’s needs.

In many situations, however, the parents (or the Grantor of any Trust, for that matter) are uninterested or unable to continue managing their assets after transferring them to a Trust. They realize that, with a revocable living Trust, using another as Trustee does not mean loss of ultimate control. The Grantor can issue orders to – or fire – the Trustee, if necessary.

If the Grantors are not to be their own Trustees, they obviously want a Trustee with a similar investment philosophy, as well as the necessary experience to handle the amount and kind of assets placed in Trust. Of course, the alternate, or successor Trustee must be equally qualified. (Unless the Grantors live forever, a back-up Trustee will ultimately be needed, even if the Grantors serve that role initially.)

In some families, an adult child is well suited for the role of Trustee, or alternate. But that choice is made many times without consideration of two practical matters. First, this child is probably a Trust beneficiary. Therefore, he is immediately presented with at least the opportunity to give himself preferential treatment. If there are other beneficiaries, they might view the child/Trustee with jealousy or suspicion – even if there is absolutely no basis for it.

Secondly, parents mistakenly assume that a child who has done well financially for himself or herself is automatically qualified to invest money for others in a fiduciary capacity. This is understandable, but think about it: Making money is one thing; managing it – for others – is quite another matter.

If a child is ruled out, and there are no other appropriate trusted friends or family members, an institutional Trustee should be considered. Generally, these are banks or Trust companies.

The fees these institutions charge are a percentage of the amount under management (about 1% or less). But they all have minimum annual fee schedules, which also depend on the degree of effort to be involved in the Trusteeship. This fee will be at least $1,000 -$2,000, and probably more like $3,000 – $4,000. As a practical matter, this dictates a minimum account balance in order for the fee to be reasonable on a percentage basis (i.e., 2% at most, hopefully less).

If active, day to day management is required of the Trustee, this would entail a fee at the higher end of the schedule. An account of $250,000 – $500,000 probably would be required to make sense. On the other hand, if the Grantor has only a lump of cash to be placed by the Trustee in a common investment fund, less work and a lower fee should be involved. Then, an account as small as $100,000 might be feasible at some places.

The fee question is just one reason why it is a mistake to name an institution without prior discussion with a Trust officer. At a minimum, you should feel personally and philosophically compatible with him/her. There should also be a frank discussion about whether the institution really wants your business. The schedule of fees and services offers the first clue as to whether the institution caters to Trusts the size of yours.

Beyond that, you must ascertain whether the institution is willing to undertake the type of Trusteeship relationship you want. On one end of the spectrum, you might desire the institution to assume total investment control. (“Don’t bother me. Just send an account statement every three months.”) This arrangement is always acceptable to the institution. It probably has several common funds oriented toward different objectives (e.g., bonds to provide maximum current income, or stocks in “growth” companies, to maximize long term gain).

Many Grantors, however, are reluctant to give the Trustee complete discretion. They want to retain some degree of involvement with their investments. For example, Grantors often have enjoyed considerable investment success handling their own investment portfolios, and simply want a Trustee to stay the course, and “not fix what ain’t broke.”

Some institutions, however, insist on immediately selling everything and squeezing you into their “one size fits all” portfolios. For some people, this can be an absolutely stupid move, from the tax and investment point of view. Institutional Trustees sometimes rationalize this by claiming they just want to be able to better monitor the investments, by keeping them limited to ultra-safe bonds and some stocks. They should tell you about this practice in advance if asked about the investment strategy that will be used.

Other Grantors are willing to allow wide discretion to the institutional Trustee as to individual selections – but only within a well-defined class of investments. Still others prefer to leave wide discretion to the Trustee, but just want to be consulted, or to give the final “yes” or “no” to any proposed investment decision.

All of these options, and many variations are available, but you have to ask, and maybe negotiate. Trust institutions are, by nature, cautious. They are very particular about the powers and authority given to the Trustee in the prospective customer’s Trust document. They all insist on reviewing the document before accepting Trusteeship. Some are not receptive to modifying their standard arrangements to suit an individual customer. Of course, many will bend their rules or dicker with you on fees, if your estate is big enough and they want the account. For these reasons, a bit of thought and investigation should go into selecting an institutional Trustee.

You will find that most institutional Trustees use Trust committees to make investments and monitor subsequent performance. In many Trusts, besides the investment committee, there is a Trust committee to determine the needs of the beneficiaries and appropriate use of Trust funds, as set forth in the Trust document. TIP: If an individual close to the family has been named co -Trustee with the institution, he/she can provide the institutional Trustee with input and advice. The decision making process can then be more informed and personal in focus. Another advantage to this approach is that the institutional co-Trustee can play “bad guy” when necessary. This can come in handy, for example, in the frequent situation where a child requests start up money for a new (but obviously doomed to failure) business venture. The parents/co-Trustees can just say “yes.” They can rest assured, though, that their co-Trustee (the bank) will veto the idea, based on an objective evaluation of the investment.

Especially if the children are young, and there will be a significant amount of life insurance money to be invested for many years, it is often best to use an institutional Trustee. The stakes are particularly high in that situation. The surviving parent may be bombarded with financial advice from many sources – well intentioned or not – at the worst possible moment for making big decisions.

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