Three Things To Consider When Choosing A Trustee
This article was originally published to Forbes.
Given the important functions a trustee serves in the care and control of trust property and the relationship they have to beneficiaries of a trust, the selection of a trustee should not be taken lightly. In choosing a trustee, the most important thing is trust. A grantor should seek a trustee with expertise in their roles and who will create stability in the management of the trust and most effectively protect and manage the trust's assets.
1. Choose a jurisdiction whose laws provide the greatest asset protection.
Often, where a trustee is located controls the law applicable to the trust. Arguably the greatest advantage a trust can have is the benefit of laws designed to protect and grow trust assets, but the ability and effectiveness in doing that varies greatly from state to state. While certain legislatures and courts have taken positions that dismantle the legal protections a trust is designed to achieve, other states have actively defended against those policies in favor of strong asset protection.
Among the latter jurisdictions is South Dakota, which has the most favorable and flexible trust laws in the United States, allowing trusts maximum protection and creative freedom. Since 1983, South Dakota law has permitted a trust to endure into perpetuity, thereby shielding its assets from gift, estate and generation-skipping taxes. Trusts are further protected by South Dakota’s top-ranked decanting and dynasty trust statutes and its second-ranked domestic asset protection statutes.
South Dakota’s trust laws also include the most favorable discretionary support statute of any jurisdiction. It does not recognize interests in self-settled or third-party trusts, limited powers of appointment, or remainder interests as property rights or entitlements. Therefore, its courts enforce spendthrift clauses, which are especially important to protect trusts for the benefit of one’s family, and refuse to enforce orders from other states to disregard them.
The state offers comprehensive, perpetual privacy and efficient, inexpensive trust modification. Plus, South Dakota trusts may benefit from favorable insurance premium taxes or the state’s income-taxless regime.
2. The trustee’s role should fit your specific needs.
A trustee is the legal owner of trust property, with a fiduciary duty to hold, maintain, and distribute it according to the trust’s terms and for the benefit of its beneficiaries. In a nutshell, the role of the trustee is threefold: administrator, investor and distributor.
First and foremost, as legal owner of the property, the trustee must perform administrative duties. This requires the trustee to keep track of the property’s records and ensure compliance with tax and other reporting requirements.
Next, the trustee’s duty to maintain the property falls under their role as investor. Investment of trust property should be in accordance with the purpose and requirements of the trust and strategically tailored to its beneficiaries’ needs.
Finally, and perhaps most crucially, the trustee distributes the trust property to its beneficiaries per the terms of the trust and in accordance with beneficiary needs. Decisions as to when and how much to distribute are the trustee’s to make.
Ideally, a grantor may wish to appoint a trustee who is not only highly trusted, but also an expert in each trustee role. Where the trustee candidate meets this high bar, it may be appropriate to create a discretionary trust, which grants the trustee maximum discretion over the control of trust property.
Of course, not all candidates will have expertise in the administration, investment and distribution of trusts. Plus, a grantor may want to retain control of some of those functions or allocate them to other individuals. Therefore, the ability to divide the trustee’s three roles among different parties can also be valuable.
South Dakota is one of the few states with a directed trust statute, which allows a grantor to appoint investment and distribution advisors to direct the trustee in those functions. Thus, a grantor may cede the trustee’s administrative responsibilities (and some of the fiduciary liability attached thereto) to an “administrative trustee” while retaining or appointing the investment and distribution roles.
3. Create stability by appointing an entity trustee.
Once a grantor has found a jurisdiction that offers adequate asset protection and an expert trustee — or an allocation of the trustee’s roles among expert parties via directed trust — the final element remaining is stability. Stability is not permanence because the ability to adapt to changing circumstances is also important to consider. Rather, stability is valuable in its elimination of uncertainty.
By choosing a corporate or entity trustee, a grantor is likely to find expert administrators, but more importantly, he creates stability for the trust. The succession problem — “Who will be trustee when Uncle Bob dies?” — is eliminated. An entity can maintain trusteeship intergenerationally, which is valuable to a trust that continues into perpetuity.
The important choice of trustee should be informed by an analysis of state law and the ability to allocate functions among trusted experts, with an eye toward creating a secure and stable instrument for generations to come.