This blog is inspired by our recent webinar, “Family Stepping Up as Trustee,” presented by Dr. Kirby Rosplock and me to members of the Purposeful Planning Institute. In it, we shared a real-life case of a peer of ours that was asked by a family member to step up as trustee for a half-sister. Turning the story into a learning case study by anonymizing it and changing certain identifiable factors, we shared our insights about the opportunities, challenges, merits, and perils that family members face when stepping up as trustees. This blog provides six tips for those considering becoming a trustee or for those who currently are family serving as trustees for another family member.
Background
Several studies point to the fact that a major wealth transfer event between one generation and another generation is underway worldwide. Much of this wealth will be structured and transferred in estate planning vehicles such as trusts. A trust is simply a fiduciary relationship whereby one party (the grantor or settlor) gives the property rights to those assets to another party (the trustee) for the benefit of a third party (the beneficiary). In its simplest form, these are the three main parties to a trust: the grantor (also called a settlor), the beneficiary, and the trustee. Other members of a trust that are also important might include a trust protector, successor trustees, independent trustees, and contingent beneficiaries.
Family as Fiduciary
Our focus for this blog is on the unique relationship when the person selected by the grantor to step up in the role of trustee is a family member. The trustee has a fiduciary relationship and responsibility to its beneficiary. The grantor places special intent, confidence, and reliance on the trustee to perform three main functions – to administer the trust, invest, and then distribute the assets with the utmost care and attention for the benefit of the beneficiary. Depending on the grantor, trustees may also have specific oversight over investments, distributions, and administrative functions. If the family member had prior experiences of being a beneficiary, they may or may not necessarily prepare one for the role, responsibilities, and fiduciary duties of trustee.
Tips for Family Members When Asked to Step Up as Trustee
1. Read the trust documents.
Often overlooked, many parties to the trust may not be as well versed with the current documents. Trustees and beneficiaries may consider reviewing the key provisions of the trust annually to remind themselves of the important terms, provisions, parties, and timelines. In reading the documents, some points to identify and summarize are the purpose, history, important provisions, state of governing law, and key parties.
For example, consider who plays each role:
- Grantor – the person who establishes the trust
- Co-Trustee – an additional trustee
- Beneficiary – the person for whom the assets in the trust are being managed, invested, distributed, or overseen
- Trust Protector – a person or institution who may settle disputes, serve as a watchdog, appoint an independent trustee, and make updates to long-term trusts for changes in law or family circumstances
- Contingent Beneficiary – a person who can inherit a trust interest from an ancestor
- Successor Trustee – a person who serves as trustee in the event a trustee is deceased or unwilling to serve in the future
- Independent Trustee – a non-family trustee, typically a professional trustee that may be an individual or an institution
- Remainder Beneficiary – a beneficiary whose interests typically vest later
Other items to look for in the trust:
- Successors (trustees, trust protectors, beneficiaries, etc.)
- Types of Trust (revocable vs. irrevocable)
- Key Dates (inception, taxable year end, year established)
- Tax ID number
In addition, a best practice is to understand the terms of the trust, including trustee powers, dispositive provisions (guidance for how trust assets are to be distributed), and administrative provisions, such as reporting and accounting responsibilities.
*For a sample trust summary and trust summary description, see page 125 of The Complete Family Office Handbook, by Kirby Rosplock, PhD.
2. Understand the grantor’s motives to select you as trustee.
Why did the grantor establish this trust? Why did they select you as trustee? What was the history and story behind the setup of the trust? This may not be information that may necessarily be found in a legal document. Because this information sometimes is not always known, you will need to conduct your own research and investigation. Often it can be difficult to find this information, particularly if the grantor is deceased. The next best step is to meet with other key parties to the trust.
3. Consider the impact to family dynamics, roles and responsibilities on stepping up as trustee.
Next, evaluate the possible conflicts of interest of becoming a trustee with you and any parties to the trust. Consider the best and worst-case scenarios, which may save some headaches and heartaches down the road. Ultimately, open and honest communication goes a long way to maintain harmonious family relationships. When family members feel like their voices are not heard, those parties are the ones often feel most hurt and disenfranchised to a fiduciary relationship. Talking early, often in calm situations, provides the best opportunity for a good outcome.
4. Weigh the opportunities with the liabilities and risks of stepping up.
What are the risks? Is that risk worth the reward? Will this role be compensated? Do I want to be compensated or will that further complicate my relationship with family? What support is in place for administration? Is there trustee insurance for the long-tail liability being taken? Are there co-trustees? Or a trust company that will take the reporting accounting, tax requirements? Is it possible to hire professionals, such as tax accountants, attorneys or investment advisors to undertake this work as needed? After answering these questions, analyse whether the benefits outweigh the liabilities, if you have the commensurate experience, what skills will be required, and what your overall rapport with the beneficiary is like.
5. Consider whether this will enhance your relationship with the beneficiary and what you can bring by stepping up.
When family consider the dubious honor of stepping up as trustee, they also must consider if they are really the right person for the job. Being a family member connected to the parties of the trust further complicates the relationship, so it is important to see how you will enhance the relationship over time, and what you might bring to the beneficiary; for example, “enhancement might mean furthering knowledge, wisdom, expertise to a particular area of investing or governance, insight to family culture or guidance to the spirit of the gift by the grantor.” When you meet with other key parties to the trust, ask yourself if these are people with whom you will be able to work harmoniously with now and in the future and what will I bring to this fiduciary relationship to enhance and strengthen it?
6. Get to know the beneficiary.
Sounds simple right? Sometimes it is not so easy. What if they are babies? What if they are differently abled? What happens if English was their second language as they were adopted or from a second marriage? Taking the time to better know who you are bound to in the fiduciary relationship may help you make the decision more easily, or perhaps, make it more challenging. Nonetheless, taking every opportunity to get to know them as a person, what drives them, what they know of the trust (or not), and what they understand of the role of trustee, may also inform your decision greatly.
Becoming a trustee provides a great service to the grantor and the beneficiaries. Your family believes in your abilities, and they entrust you to handle an important and sometimes complicated job. The role will evolve just like the potential needs and wants of the beneficiary with respect to their trust. Family could be extraordinary stewards, significant influencers and positive role models, which may be an unbelievable “gift”, in a manner of speaking, to other family members, regardless of becoming a trustee. Each family member must weigh the opportunities and risks of stepping up as trustee and consider the best outcome for the beneficiary, when making their final decision.
You can learn more about their webinar, “Family Stepping Up as Trustee,” and read more about Lydia Tuthill and Kirby Rosplock by clicking here.