1st Aug 2014

POWER POINTS

+ Your choice of trustee can be the most important factor in efficient administration, conflict avoidance and asset protection.

+ It is important to understand the powers and responsibilities of the trustee, particularly as they relate to unexpected scenarios that may arise.

+ The benefits of appointing an unrelated trustee often outweigh the costs and can significantly enhance the asset protection elements of your trust.

Choosing the right trustee or successor trustee is one of the more intricate decisions to be made when planning your estate. Due to not only the common factors that affect all trusts—such as the nature of assets, maturity of beneficiaries and complexity of distributions—but also the unexpected scenarios that may arise in the future, it is important to understand the costs and benefits of each trustee option. Additionally, as the circumstances of your beneficiaries and estate change, it is important to review your trustee and successor trustee selections and ensure that they will serve your goals.

Trustee’s Time Commitment

Depending on the terms of the trust, serving as trustee may require a significant time commitment. The trustee is not only responsible for investing trust assets, filing tax returns and providing accountings and updates to the beneficiaries, but also for addressing their questions, concerns and requests. If the trust is not drafted clearly and correctly, the beneficiary may attempt to use loopholes or make constant demands of the trustee in order to expedite the distribution of trust assets. These responsibilities can quickly consume the trustee’s time and energy and it is therefore important to consider this factor when choosing a trustee.

Trustee’s Relationship with Beneficiaries

Another issue to consider when naming a trustee is whether he or she will be able to say “no” if one of the trust beneficiaries makes an unreasonable request. Depending on the terms of the trust, distributions may be permitted based (a) on legally defined standards, such as health, support and education, (b) at the trustee’s discretion for the best interests of the beneficiary, or (c) upon the beneficiary reaching certain ages or accomplishing certain achievements, such as college graduation.

A friend or relative of the grantor who has an existing relationship with the beneficiaries may be hesitant to deny a distribution for fear of harming the relationship. On the other hand, a third-party trustee, such as an attorney or professional trustee, is obligated to strictly enforce the terms of the trust. Additionally, the drafting attorney has an intimate knowledge of the grantor’s intentions and concerns when the trust document was prepared. Depending on the relationships and circumstances of the beneficiaries, an unrelated trustee may be a better option for efficient trust administration.

Asset Protection of Beneficiaries

When drafted correctly, a trust can provide significant asset protection for the beneficiaries. Since beneficiaries are often preoccupied by amounts rather than best practices, the trustee must monitor and advise the beneficiary of the available protection. An uninformed beneficiary may immediately withdraw assets as soon as he or she is permitted to do so for one of many reasons, including desire for control or fear that the assets will be given to another beneficiary or misappropriated by the trustee. Withdrawing assets may subject the beneficiary to increased tax liabilities (in the case of retirement accounts) or exposure to creditors or divorce (if the beneficiary commingles his or her inheritance with personal or jointly owned assets). However, the right trustee should understand his or her powers under the trust document and be able to inform the beneficiaries of the consequences of withdrawing assets, and when necessary, deny a withdrawal request.

Trustee’s Fees

A trustee of an Illinois trust is entitled to reasonable compensation for his, her or its services. There are many factors which must be considered in determining whether a fee is reasonable, including the types of assets held by the trust and the complexity of administration. While financial institutions often have fixed fee schedules consisting of a percentage of assets under management plus an hourly fee, an individual trustee may be compensated based on the fees stated in the trust document or, absent such guidance, at a rate that is agreed to by the beneficiaries.

As always, the lowest cost option—naming one or more of the beneficiaries as trustee—may not be the best option. Other beneficiaries may take offense to not being named or disputes may arise regarding the fairness of distributions. If these are valid concerns for the grantor, appointing the drafting attorney or another unrelated individual to administer the trust may be the preferred option. As mentioned above, the drafting attorney should have intimate knowledge of the grantor’s intentions, concerns and assets and can ensure the efficient administration of the trust. Additionally, an unrelated third party can be impartial and accelerate or deny distributions when necessary so long as he or she is empowered to do so under the terms of the trust.

Your Decision

Choosing a trustee or successor trustee should not be a hasty decision. There are several issues to consider when choosing the right trustee, but the primary consideration should be how you, the grantor, envision the distribution of assets to your beneficiaries. Your estate planning attorney should advise you on the various scenarios in which your trustee selection may become a factor. While minimizing costs is always important, choosing a trustee who understands the terms and intentions of the trust and can maximize the asset protection provided by the trust is vital.

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