RSM Resources

The Chicago-based Pritzker family has experienced high-profile difficulties with its trust funds during the past couple of years. The family — which has more than $15 billion in trust funds and holdings that include the Hyatt chain of hotels and resorts, Royal Caribbean cruise line, Trans Union credit bureau, and more than 100 other companies — was sued by two young family members who alleged the trustees (other family members) had misappropriated more than $1 billion from their trust funds.

The lawsuit — which was settled with the two heirs receiving $500 million each to relinquish their claims to family assets — brought attention to the trustee role and relationship issues that trusts of any size can experience.

Revocable living trusts — legal agreements that detail how you want your assets managed while you’re alive and distributed after your death — can help you avoid probate, reduce estate taxes and preserve privacy. They’re quickly becoming the preferred form of estate plan for many families, according to Tax Management Estates, Gifts and Trust Journal. With the right trustee, or administering party, this type of trust can efficiently manage your financial affairs.

Selecting a trustee

"The choice of the trustee is one of the most important decisions you make when entering into estate planning," Daniel M. FitzPatrick, former president and CEO of the Goldman Sachs Trust Co., told Worth magazine. "You’re leaving decision-making to someone when you’re not around, and ultimately you’re picking a person or corporation you trust to be true to your interests and put them ahead of their own interests."

Your trustee, or trustees, can be a family member or friend, trusted professional, corporate entity, or a combination.

Family member or friend.Most often, people turn to a family member, business associate or close friend when choosing a trustee. This person, due to your relationship,is not likely to charge fees.

Professional advisor. Depending on the size of your trust and the level of sophistication required to administer it, you may wish to designate a professional — such as an accountant or attorney — to serve as your trustee. A professional advisor will most likely charge a time-based fee to be paid by your estate.

Corporate entity. A corporate trustee is another option, particularly if your trust includes a business or other difficult-to-manage property or is multigenerational in nature, or you anticipate acrimony among your beneficiaries. A corporate trustee will charge a fee, usually a percentage of the assets being managed.

If your trust is a dynasty trust, or multi generational trust, the longevity of a corporation is appealing, as is its neutral status. A corporate trust organization will be well-prepared to address inevitable conflicts between generations about appropriate investment levels.

Combination. Administering a trust often involves balancing good family communication with knowledge of investments and taxes. Appointing a family member or friend as your primary trustee and appointing a professional as co-trustee can help achieve that balance. Your family will still feel connected to the process through a trustee that they personally know, and that individual will have the comfort and expertise of a professional when making decisions about the financial future of your family.

Qualities of a good trustee

Your trustee will enter into a fiduciary relationship with your beneficiaries, so he or she is duty-bound to act in their best interests. The top factors to contemplate when determining the suitability of a trustee, according to the Tax Management Estates, Gifts and Trusts Journal, are:

• The candidate’s willingness and desire to serve as a trustee.
• Potential conflict and family hostility, particularly important in second marriages or when one child is named a trustee for others.
• Honesty, objectivity and reliability of prospective trustees.
• The potential trustee’s administrative skills and expertise with investments — or ability to recognize when to hire advisors with specialized knowledge.
• Duration and complexity of the trust.
• Compensation requirements of firms or advisors under consideration.

Duties of a trustee

The trustee is responsible for administering the trust, which requires understanding the agreement and clarifying uncertain terms. The trustee must disregard any terms of the trust that are impossible or illegal.

The trustee needs to avoid conflicts of interest and self-dealing. Examples of self-dealing include:

• Selling, leasing or borrowing trust property for the trustee’s personal benefit.
• Using trust property or connections for personal profit.
• Engaging in business that competes with the trust.
• Acting for a third party who also deals with the trust.

The trustee is responsible for administering the agreement with the care and skill of a prudent person dealing with his or her own property. Investments are covered by the "prudent investor rule," which is a standard of conduct from the uniform probate code. Prudent investing does not necessarily mean a positive return on the investments, particularly in a down market.

According to the rule, the question of whether a breach of trust has occurred turns on the prudence of the trustee’s conduct, not on the eventual results of investment decisions. The trustee is not a guarantor of the trust’s investment performance.

The prudent investor rule includes five concepts: Diversify soundly, analyze and make conscious decisions about the appropriate level of risk, minimize fees and transaction costs, avoid conflicts of interest, and delegate investment functions similarly to other prudent investors.

The trustee is also responsible for:

• Avoiding unreasonable expenses.
• Collecting and preserving trust property (including protecting, insuring, paying property taxes and mortgages on, and maintaining productivity of, real estate).
• Using reasonable measures to enforce claims owed to the trust.
• Preventing beneficiaries from using trust property unless outlined by the agreement.
• Paying designated income to beneficiaries and making decisions about discretionary distributions.
• Working with any co-trustees for the benefit of the beneficiaries.
• Keeping accurate records.
• Acting confidentially.
• Selecting an appropriate successor.

Reviewing a trustee’s actions

Trustee frustration is fairly common.

"There’s a natural resentment of somebody managing money we think should be ours," Richard Kahn, a trust attorney and partner at the Florham Park,N.J., law firm Pitney Hardin, told Worth magazine. "Probably in 25 percent of cases, there’s somebody that [trust beneficiaries] would like to be able to fire, whether they can or not."

The most common areas of conflict are investment strategies and personality conflicts. If the situation is unmanageable, and a beneficiary wants to replace the corporate trustee with another individual in the same office or move to an office in another geographic area, that’s usually easy to accomplish. Some trusts provide for one corporate trustee to substitute for another.

Often, beneficiaries decide the hassle and cost of the legal action required to replace a trustee isn’t worth it. Going to court is the last resort, because it’ll bring the family trust into the public domain. Courts are reluctant to get involved in a family dispute, so your beneficiaries must have a substantive complaint.

According to Worth, 10 states permit beneficiaries to remove trustees for lack of cooperation (provided it impairs the administration of the agreement) or persistent failure to administer their duties. It still involves time and costs, because the trustee is entitled to an audit to help fend off a lawsuit, and transferring paperwork can take four to eight weeks. Additionally, some trustees may insist on a termination fee of 1 percent of the assets.

Top mistakes made by trustees

Court intervention is occasionally necessary. According to Tax Management Estates, Gifts and Trusts Journal, the top reasons for judicial action are failure of the trustee to:

• Follow the terms of the agreement with reasonable dispatch.
• Separate trust assets from personal assets.
• Keep beneficiaries informed.
• Take the advice of competent professionals.
• File trust income taxes.

Families and relationships change. By choosing the right trustee, you’ll help your family avoid many of the most common trust issues.