May 6, 2010

Trustee Appointment

In short, a trust is an instrument in which there is a settlor (or trustor), the person who creates the trust, a trustee, the person who manages the trust and a beneficiary, the person who enjoys the benefits of the trust. 

There is no requirement that there be a different person for each position. Rather it is quite common for the same person or persons to hold all three positions. For example, a husband and wife will commonly draft a trust and appoint themselves as trustee while simultaneously being the beneficiaries with the remainder of the trust going to their children after both of their deaths. Since husband and wife will eventually pass on, there is a need to appoint a successor trustee. 

The pool of sources usually encompasses family members, corporate trustees, private professional fiduciaries and other professionals. 

There are strengths and weaknesses to each group.

1. Family Members

In the case of family members, they will be sensitive to the needs of the beneficiary, children most likely, and thus can cater to the needs of those children. Moreover, a family member is unlikely to charge a large fee for serving as trustee. 

However, being the trustee entails a significant amount of legal liability, an aspect that many people have not undertaken or can appreciate. For instance, I have encountered a number of cases where a family member inexperienced in trust administration and without the assistance of a lawyer, squandered the trust estate through foolish and wasteful spending. This is not necessarily surprising given that there is a common misperception that trust administration is simple, ostensibly free and overly expedient.

2. Corporate Trustee

In light of the significant amount of responsibility accorded to a trustee, some settlors pick a corporate trustee, such as a bank and trust company, to act as the successor trustee. The benefit in selecting a trustee is that a corporate trustee generally possesses fiscal competence, the ability to manage assets and knowledge of a trustee’s ongoing duties. Thus, the possibility of the trust estate being depleted through imprudent investments or foolish purchases is diminished. 

Yet with this degree of fiscal sophistication comes a monetary cost. Corporate trustees usually require the trust to have a minimum amount in assets before it assumes trusteeships. In particular, prominent corporate trustees require a minimum trust estate of at least $1,000,000 dollars before it assumes responsibility typically. Furthermore, another drawback is the corporate trustee’s fee. A corporate trustee’s fee is commonly based off of the trust estate in percentage terms. For example, a corporate trustee might charge 4% for trust administration based off of the value of the entire trust estate. Thereby in the case of a $1,000,000 trust, the corporate trustee would charge $40,000 to serve as trustee, an appreciable amount of money.

3. Private Fiduciary

A hybrid option between a family member and a corporate trustee is a private professional fiduciary. They may have a combination of skills including social work, bookkeeping, accounting and institutional trust administration. In regards to competency, private professional fiduciaries must meet certain state requirements to operate under the Professional Fiduciaries Act (Bus & P C  §§6500-6592). Although, as in the case of a corporate trustee, a private professional fiduciary’s fee is quite high. A typical private professional fiduciary might charge $125 an hour to handle trust administration.

4. Attorney

Finally, clients often ask the attorney who drafted the trust to serve as the trustee. Even though an attorney would have intimate knowledge of a trustee’s duties and liabilities, there are multiples reasons why this a poor decision. 

First, there are ethical issues involved with appointing the drafting attorney as trustee. An attorney owes a duty of loyalty to each and every client and thus must avoid representation that presents a conflict of interest. Cal Rules of Prof Cond 3-300. If the attorney has previously represented a beneficiary and is now acting as trustee of the trust, the attorney is trapped between following the terms of the trust and representing his former client’s interest, namely beneficiary, which might or might not be in harmony. Thus, it creates a conflict of interest as the attorney must heed to the needs of two parties that might diverge. 

Second, per Prob C §15642(b)(6), the beneficiaries of a trust of which a "disqualified person" (see attorney who drafted the trust) is the sole trustee can remove the disqualified person-trustee. Accordingly, if the attorney-trustee can show that it was the settlor's intent that the attorney serve as trustee and this intent was not the product of fraud, menace, duress or undue influence (the burden of proof rests on the attorney-trustee), the court can permit the trustee to continue. Yet if the court finds to the contrary, it can impose all costs of the proceeding, including attorney fees, on the attorney. Prob C §15642(d). 

Third, a trustee who is an attorney may generally receive only the trustee's compensation or compensation for legal services performed for the trustee, unless the trustee obtains approval for the right to dual compensation. Prob C §15687(d). This prevents an attorney-trustee from “double-dipping” in that the attorney is not entitled to compensation as both the trustee and as the trust’s legal counsel. In light of this, I have declined to be the successor trustee each time a client or clients have asked that I serve as trustee.

On the whole, most of my clients have ultimately decided on appointing a close relative as the successor trustee since the close relative would be most attuned to the beneficiary's needs.