How to hire a trustee for your estate

December 10, 2010

An employee of the Korea Exchange Bank (KEB) counts U.S. 100-dollar bills at the bank's headquarters in Seoul October 13, 2008.  REUTERS/Lee Jae-Won  Trusts, which provide a highly flexible and advantageous way to arrange your financial affairs, can reduce your tax burden, shift your assets to the next generation and transfer a house to a family member, among other numerous benefits.

It’s no surprise they have become increasingly popular estate planning vehicles over the years.

But what is surprising is that choosing the right trustee to oversee a trust is much more challenging than many family members realize.

A trustee, like a doctor, should be chosen with the utmost care. “It is a monumental task,” says Bill Fleming, a managing director at PriceWaterhouseCoopers. “I am looking for an alter-ego of myself,” he says. When making this important choice, a number of considerations should be taken into account.

Trustees, whether it is an individual or an institution, should be efficient, businesslike, organized and responsive. Sometimes a trustee is required to exercise broad discretion, such as deciding when family members should receive funds and at what times.

It could be that these decisions be made without any requirement that the family members be treated equally. Such scenarios require “a trustee who can be relied upon to understand and act on the grantor’s values and priorities,” says Larry Elkin, president of Palisades Hudson Financial Group as well as a certified financial planner and certified public accountant.

In many cases, the person best prepared to step into the grantor’s shoes is a family member. “They are generally more attuned to the dynamics and the personal relationships involved,” says Tucker Boynton, chairman of the trusts, estates and personal planning practice at Stradley Ronon Stevens & Young LLP.

Plus, a family member isn’t likely to want compensation. Relatives tend to be more time-sensitive. Another advantage is that they can be flexible — institutional trustees often see things in black or white.

The disadvantage, however, is that a family member might not be sophisticated enough to realize what is going on. But a good attorney can always educate the family member, Boynton says.

Some families prefer an institutional trustee. In these cases, it is essential to vet the institution and make sure there is an established trust department. “With the changes in the banking industry some of the same institutions and the professionals associated with them are no longer there,” says Jane Brown, a private wealth services attorney for Gunster Law Firm.

When choosing an institutional trustee, families are getting a whole bunch of services — from trust administration to investment management. “Usually, those roles are taken on by two different people,” says Brown. To that end, it is important to find out how they will invest and administer the trust monies and look at the needs of the beneficiaries. “You’ll want to find an institutional trustee that will ensure that the fund isn’t diminished,” says Brown. That means, it is essential to research their investment strategies.

The cost of an institutional trustee can be negotiated. Typically, it is a percentage of assets under management. “If it is an investment, it will run anywhere from 75 basis points to 2 to 3 percent of assets,” says Fleming. At the higher end, families will get tax preparation, education services for children, financial literacy for kids, budgeting and cash flow monitoring.

At the lower end of the scale, says Fleming, families get investment management on a portfolio, check writing and fund distribution. The pricetag? One percent or below one percent of assets in the account, says Fleming.

If you are worried about fraud, bad news — it is very difficult to get trustee insurance. “Sometimes fiduciaries are required to post bond,” says Boynton. “It always makes me nervous when an individual trustee has a checkbook,” he says. That’s why it is essential to always pay attention and keep good records.

Whether a family member or an institution is chosen, it is smart to have co-trustee. “Trustees die, get sick, change jobs or get acquired,” says Elkin. Continuity is key.

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