28 April 2017

Picking a Trustee

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When setting up a trust, people often turn to a relative or confidant to oversee it. That is natural enough, considering trusts frequently have a highly personal purpose—passing on wealth to loved ones—in addition to a common aim of minimizing taxes. Who better to serve as trustee than someone who has been part of your life for many years? But ties of friendship and family can be complicated by emotions and other factors. And a close relationship isn’t necessarily the best qualification for grasping and carrying out the terms of a trust, estate planners say. In many situations, designating a professional trustee may be a better option, even if it comes with its own issues, such as higher costs.

Estate-Tax Thresholds 

Trusts typically make the most sense for people planning to leave more than $5 million—or $10 million for a couple—now that the threshold for paying federal estate taxes was set at those levels two years ago and indexed to inflation. Still, other people might want a trust to minimize state estate taxes or exert greater control over their financial legacy. For example, parents passing along a large estate to their children may want to put conditions—such as finishing college or encouraging charitable donations—on how and when those assets are distributed after the parents die.

A pro also is likely to be more removed from family or personal dramas.  Adrienne Penta, oversees the trust operations and wealth-planning services in Boston for Brothers Harriman Private Bank, says her firm recently discovered a trust that had terminated many years ago. The assets should have been distributed outright to the beneficiary, but the trustee—a business acquaintance of the trust’s creator—wasn’t paying attention and didn’t realize that the trust had terminated. This created a number of legal issues, she says, because the assets were no longer owned by the trust and had to be retitled in the name of the beneficiary before any further investment decisions could be made.

There can be downsides to choosing a pro over a family member or friend. Professional trustees, such as trust companies, often charge a fee based on the assets in the trust, Ms. Penta says. She says it isn’t unusual for a pro to charge an annual fee of 0.20% or 0.25%, or $20,000 or $25,000 for a $10 million trust. There may also be concerns that a pro—despite a fiduciary obligation to always act in the trust beneficiary’s best interest—may nonetheless be more focused on the bank’s interests than the needs of the family.

In the case of a trust that oversees a family business or property, an associate who has long been familiar with that asset and how it functions may have an advantage. In some estate plans, co-trustees are designated, one of them a pro and the other a family member or other nonprofessional. Such compromise arrangements can vary, with some requiring co-trustees to agree on all decisions and others dividing up responsibilities.

Replacing a Trustee 

Experts say individuals setting up trusts should make sure their trust documents include a mechanism for removing and replacing a trustee, regardless of whether it is a pro or your uncle. One tactic is to name a so-called trust protector, who can make various administrative changes to the trust document, including the removal of a trustee, without needing to take the matter to court. Some trusts even give a beneficiary the power to remove and appoint successor trustees.

Click here to access the full article on The Wall Street Journal.

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