By Mark Dreschler, CFP®, President & CEO at Premier Trust and Deborah Erdmann, QKA, CISP, Vice President & Trust Officer at Premier Trust | Volume 2, Issue 4 (April 2014)
Whatever your connection with a trust, whether it is as an attorney, trustee, beneficiary, trust creator or financial advisor, you need to be aware of the top four mistakes that can derail financial goals and tear families apart. This article is based on the experiences of our trust company’s team members, now more than 38 strong, with more than 150+ years combined experience dealing with estates and trusts of all types and sizes.
Over the years, we’ve witnessed estates diminish due to taxes, legal fees, mismanagement, improper advice and mistrust. One of the most important decisions in setting up a trust is choosing a trustee that can handle the trust’s affairs in the manner intended. When choosing a trustee your options fall into the following categories: Individuals, Corporate Trustee, or Team/Co-Trustees. This article will cover the pitfalls to be aware of when choosing an individual trustee and how to avoid them.
Trustee Mistake #1: Not talking about compensation
Unlike corporate trustees, that have a published fee schedule, it is up to the individual to negotiate a reasonable fee for their trustee services. While some individual trustees may feel uncomfortable talking about money, it’s important to have the fee conversation up front.
The risk of not discussing fees up front is that years later, when the individual trustee decides it is time to get paid, the end result may require court action. What sometimes happens is that a trustee will serve for a number of years at no fee, but then when it starts taking too much time/effort they will want to be compensated. Since the fee had not been discussed or taken before it can cause some issues with the beneficiaries and even result in a strained or severed relationship.
Trustee Mistake #2: Incomplete Reporting
There has been a dramatic increase in the number of lawsuits involving trusts and estates in the last ten years. Individual Trustees need to be aware of the responsibility, risk and liability involved in their role. They are required to invest or oversee trust assets, prepare or coordinate tax returns for the trust and prepare accountings for the beneficiaries of the trust. They are also required to document all of their decisions, including why they decide to deny or approve distributions from the trust. Failure to adhere to these responsibilities can result in the beneficiaries challenging the investments and/or distributions from the trust in court.
One example of an often overlooked administration requirement comes up in the case of Individual Life Insurance Trusts (ILITs), where proper recordkeeping also means sending out Crummey notices each year. This notifies that a gift was made to the trust and informs beneficiaries of their withdrawal rights. Failure to issue these notices can have consequences, so it’s important for a trustee to maintain proof that the notices were sent.
Trustee Mistake #3: Not remaining neutral
The trustee must be able to look past their own interests and follow the trust documents and instructions when making decisions about distributing funds. This can be difficult if the trustee is related to a beneficiary or has emotional ties to the family. For example, it may be hard to remain neutral in a situation where the trustee needs to decide if money from the trust should be used to fund a sibling’s real estate venture. One way to avoid this situation is by naming a corporate co-trustee who can look at the situation free of emotional baggage to help make a better decision.
Trustee Mistake #4: Not understanding or adhering to the fiduciary duty
Trustees are required to manage the trust with the best interest of the beneficiaries in mind. Trustees are also subject to regulations like the Uniform Prudent Investor Act, which is designed to protect beneficiaries from inappropriate investment choices. This means that the trustees who invest and manage the trust assets can be held liable for investment losses or missed opportunities and profits that beneficiaries could have enjoyed if they had been more prudent with their investment choices.
Investment management is the most litigated area of trust administration. The process can be long and difficult and lead to significant trust assets being spent on legal fees. Make sure the person you choose as a trustee has the necessary skills to understand and meet the fiduciary requirements.
Why Use a Corporate Trustee?
A corporate trustee employs professional trust administrators who can be counted on to fulfill the obligations required of a fiduciary. This means a professional trustee can offer a greater consistency and continuity of service than an individual trustee may be able to provide. A corporate trustee is also subject to many levels of oversight from internal auditors, outside auditors, and government regulators—all for the protection of the trust beneficiaries.
Selecting the proper trustee is crucial. You want someone who will provide careful management of trust assets, exercise the appropriate level of diligence when executing the trust maker’s wishes, and demonstrate the ability to put the interests of your beneficiaries first. Above all, you want a trustee who will build and maintain a relationship with the client and his or her family over the many years required to administer most trusts.
ABOUT THE AUTHORS
Mark Dreschler co-founded Premier Trust with Robert Bruderman in July, 2001. He has been the Company’s president and CEO since inception. Mr. Dreschler oversees all aspects of business management and development as well as trust administration. Premier currently employs a staff of twenty-eight, with eight trust professionals. Mark has thirty-eight years tenure in the trust industry. Mr. Dreschler has been and is currently actively involved with the Las Vegas and greater Nevada professional and local communities. He is a regular guest on the local PBS station providing commentary on the estate and trust industry. He received a BA in Economics from Potsdam State College of New York, is a Certified Financial Planner, and holds a certificate from the Trust Division of Pacific Coast Banking School. Contact Mark at: [email protected]
Deborah Erdmann joined Premier Trust in 2010 as a member of the Employee Benefits Department, specializing in Qualified Plans and Self-Directed IRA’s. Her career began in the pension industry in 1993 with Principal Financial Group in the Pension administration department. Before joining Premier she worked for a third-party administration firm in Nevada. Deb obtained a Bachelor’s degree in MIS from Buena Vista University in Storm Lake, Iowa. Additionally, her professional accreditations include ASPPA (American Society of Pension Professionals and Actuaries) membership since 1999, the designation of Qualified Pension Administrator (QKA) and Certified IRA Services Professional (CISP). Contact Deb at: [email protected]