Non-Tax Estate Planning Considerations

One of the most important aspects to consider when designing one’s trust is the role of a trustee and successor trustee. This often overlooked feature requires careful thought in identifying who would be the most qualified and effective in the role of a trustee.

Estate attorneys, in the past, have focused primarily on how to minimize estate taxes; however, with the advent of the American Taxpayer Relief Act of 2012 which included a very high Federal estate tax exclusion and portability option, this may no longer be the main goal.

When considering who would be best to serve as a trustee, one must consider the various circumstances which often vary dramatically from one family to another. The factors that should be considered and taken into account when analyzing whom to use as a fiduciary depend on the various trust characteristics:

  1. What will be the duration of the trust? Will it be decades or longer or just a few years?
  2. What will be the total value of the trust? A trust holding thousands of dollars may find it appropriate to use one trustee while a completely different trustee, possibly even an institution, may be more appropriate when the trust is worth millions of dollars.
  3. What are the objectives of the trust? Will the trust provide any of the following?
    1. Professional investment management
    2. Asset protection
    3. Protection of beneficiaries from their own improvidence
    4. Minimizing taxation
    5. Multiple generations
    6. Encouragement of positive behaviors while discouraging negative ones.
  4. What assets will be held in the trust? Financial instruments or cash are relatively easy to administer; however, a trust holding property will be much more challenging, especially if it is farm or commercial property. While at the same time a more complex arrangement might be a trust holding mineral interests or equity in a closely-held business.
  5. Who are the beneficiaries? Beneficiaries may consist of individuals who may have a mental or physical impairment or may be minors and unable to manage their own assets. A difficult personality or a spendthrift requires careful consideration along with the beneficiary’s age, position in his family, health status, and personal financial situation. All of the above will impact the trust administration and decisions to be made by the trustee.
  6. What will the dispositive provisions be in the trust? These provisions could be very easy to administer provided they don’t involve the exercise of discretion, i.e., mandated periodic payments are much easier to manage than full discretion by the trustee as to how much to distribute, when to distribute, and for what purposes – possibly based on an objective standard or just simply in the trustee’s sole and absolute discretion.

Trustee characteristics are varied and the following should be considered:

  1. Trustee Expertise? Does the trustee possess the acumen and experience to perform the job? Even though the trustee may engage agents and/or assistants to provide the necessary expertise in areas the trustee may lack, the trustee is ultimately responsible in the selection of the individual’s or establishments he retains to help administer the trust.
    Is the proposed trust an independent trustee or will there be an inherent conflict of interest if it is a family member? Most conflicts arise because the proposed trustee may have a beneficial interest or the proposed trustee could have a personal, economic interest in the trust assets.
  2. What will be the longevity of the trustee? Unless the trustee is a corporate fiduciary, it is important to take into consideration the age and health of the proposed trustee.
  3. Will the trustee have an appropriate fiduciary demeanor? A trustee will be up against potentially multiple beneficiaries wherein the trustee may please one but not the other, causing much distress. The trustee must possess the qualities of prudent judgment and have the resolve to make and defend decisions he has made, especially when facing potential lawsuits.
  4. Will the trustee be compensated? Trust administration is never free, even if a non-professional trustee is not compensated. A non-compensated trustee will still have to compensate third parties in order to render services of administration in areas where the trustee lacks experience. The location of the trust may be important. Having the trustee in close proximity to the beneficiaries may be more important than realized. It could promote smooth trust administration.
  5. Will the trustee be accountable? If the trust experiences losses due to the trustee’s malfeasance, will the trust be made whole? This is more likely if a corporate fiduciary is serving versus an individual trustee unless the individual trustee is bonded which may be a very difficult task.

As you can see, deciding on the initial trustee and successors takes considerable thought and many times is not treated as diligently as it should be. Understanding this reality will help produce a thoughtful and deliberate trustee selection.