An item in Barron’s a few years ago by Lauren Foster demonstrates that being a trustee may be harder than some people expect (“The Five Biggest Ways to Bungle a Trust,” May 21, 2011). Foster’s observations are must reading for anyone who expects to be a trustee, or who has nominated a family member to serve as a fiduciary.
Here are the five traps that Foster highlights:
- Faulty records. There’s much more to trust accounting than balancing checking accounts and keeping track of portfolio statements. Income, asset values and distributions must be reported to the beneficiaries on a regular basis. “Beneficiaries” refers not only to those who receive current trust income, but also to those who will receive the assets when the trust terminates. Foster suggests a team approach, including a trust attorney, a tax professional and an investment manager. Note: We are pleased to serve as agent for a trustee!
- Failure to diversify. Laws governing the prudent investment of trust assets vary from state to state. In general, concentration of assets should be avoided. According to experts quoted by Foster, a red flag should go up when any one holding accounts for more than 10% of a trust. Problems with that holding could lead to lawsuits by disgruntled beneficiaries against the trustee. On the other hand, the person who creates a trust may override the diversification requirements. For example, shares in a family business could be exempted from the diversification mandate.
- Biased distributions. One of the most important benefits of trust-based wealth management is delivery of financial resources to multiple generations, today and in the future. Trouble is, finding the appropriate balance between current and future interests is not easy. Trustees need to document reasons for allowing or denying invasion of a trust for particular beneficiaries, for example. What’s more, the investment strategy chosen for a trust may inadvertently favor some beneficiaries over others. When a family member is a trustee, the issue of bias can become quite emotional.
- Expecting a payday. Trustees should be paid, but beneficiaries don’t always see it that way. When the trustee is a family member with an interest in the trust, the payment issues can be especially sensitive. Compensation matters should be settled before the trustee assumes the duties of trust management.
- False sense of safety. Some amateur trustees assume that, given their relationships to the family and trust beneficiaries, their work won’t be scrutinized closely. Not so, Foster reports. The role of trustee has potentially unlimited liability. Trustees may be called to account for their investment choices, as well as for the quality of their fiduciary judgments about trust distributions.
The Professional Alternative
Given the complexities of modern trust management, one would expect that businesses, such as trust companies and bank trust divisions, would become available to meet the need. One would be absolutely correct! That’s us!
We offer you our technical skills and our financial and auditing infrastructure for the successful implementation of your trust plan. Most importantly, we offer you our experience as trustee. It’s a truism that every wealthy family is different, and so is every trust plan. Yet all trust management is governed by the legal standards of fiduciary duty. We’ve seen a range of family circumstances, of market environments, of trust purposes and objectives. We invite you to put our experience to work for you and your family.
© 2013 M.A. Co. All rights reserved.