When you do your estate plan, you have to choose someone to handle your property and financial affairs during your mental disability as well as after your death. You may be tempted to name your spouse or the kids in birth order because you think that this is the fair thing to do. But is it the right thing to do? Have you really thought about the skill set that is necessary for the job that needs to be accomplished?
You have to appoint financial power of attorney agents to handle your finances during your mental disability. You also have to name personal representatives in your will to handle your assets after you are gone. If you have a trust, you have to name successor trustees to manage the property in your trust for you during your lifetime and for your beneficiaries after you are gone,
The primary duty of these financial agents is to preserve and protect your asset for you during your lifetime and for your named beneficiaries after you are gone. Do your spouse and the kids, in birth order, have the skill set to handle your finances and other property? Maybe money management skills are not one of the gifts that God has given them.
It may make sense to hire financial professionals to manage these assets. There are two main types of professional trustees. The first group are individuals in the financial services industry, such as accountants and tax preparers. Many CPA’s already provide financial services to their clients with payroll or bill paying services. The week before last, I spent a whole day providing training to Michigan CPA’s who administer their clients’ estates and trusts. And CPA’s already have the processes and procedures in place to provide efficient cost effective accounting services to keep track of everything.
The second group of professional trustees are trust companies. Trust companies are regulated financial institutions that regularly handle and manage the finances and property of others, for a fee. Most of trust companies with which I have had dealings are trust departments in commercial banks or captive trust companies affiliated with brokerage or insurance companies. Most trust companies have trained trust officers and investment advisors whose full-time jobs are to manage property and finances of others. They generally have specialized staffs to provide the needed services.
You may be tempted to ask your attorney who drafted your estate plan to act as trustee. Most attorneys are not in the financial services industry, are not investment professionals, nor do they have accountants on staff to keep track of the assets and pay the bills. In addition, their rates are generally higher than either accountants or trust companies. I have known of a number of attorneys who prepare unfunded trust-based estate plans and have their clients name the attorneys as personal representatives in their wills and successor trustees of their trusts.
In order to get the assets into the unfunded trust after a death, the estate must be probated and the attorney gets a fee for being a personal representative of the estate. The personal representative needs an attorney, so they hire themselves as attorney for another fee. Once the assets are in the trust, the attorney gets continuing fees to act as trustee. And of course the trustee needs an attorney, so they hire themselves as attorney for another fee. Four fees at attorney rates.
Although I am a CPA as well as an attorney and used to do accounting for a living, even though I am regularly asked, I generally do not act as personal representative of my clients’ estates nor act as successor trustee for my clients’ trusts. I would rather be the legal counsellor advising my clients and their chosen successors. Accountants and trust companies are typically more economical than attorneys administering trusts and estates and can do it more efficiently.
I’ve had clients who have asked, why should I hire a professional trustee, when my spouse/son/daughter (pick one) would do it for free? There are many reasons why individual family trustees have challenges and why it may make more sense to hire professional trustees. Here are the four most common reasons that I have seen why you may want to hire professional trustees.
- Lack of time.
Often times, individual trustees do not have the time to properly administer a trust for others. Think about the time it takes to manage your own family finances. Do you have the time to take on the administration of a trust and all of its assets and deal with demanding beneficiaries? Do you want to make this your lifetime hobby? Also, life gets in the way. There are other things to do. This is the same reason that we never have seen a trustmaker able to completely fund their trust on their own without professional assistance. We have seen trusts drag on for years because the trustee just did not get around to it.
Professional trustees do this for a living, full-time. They are set up to manage the property and finances for others. They are generally bonded and/or insured. They have to get around to it, because if they didn’t, they would be out of business.
- Lack of skills.
Individual trustees may be able to handle their own family finances just fine. However, trusts rarely have the same assets as your trustee’s own assets. Do they understand trusts and their legal duties and obligations? Trusts and estates often have retirement accounts and other tax-deferred or tax-advantaged assets. Do the trustees understand the state and federal tax ramifications of these assets, not only on the trust, but also on the trust beneficiaries? Do they have experience managing the marketable securities, investment real estate or other assets of the trust? Professional trustees will either have the skills or will hire it out.
- Adverse effect on family relationships.
When one child is appointed trustee before another, it can create animosity between them. If they already are not getting along, this could just add fuel to the fire. It is often difficult for family members to be objective, particularly where different beneficiaries have different and opposing interests or where emotional family relationships are involved. There always seems to be family baggage.
You may have a child or other beneficiary who lacks money management skills. It seems real easy to name another child who has the money management skills to be the trustee over their sibling’s trust. If the beneficiary sibling did not already hate their trustee sibling, they will the very first time that they ask for money and the trustee sibling will not give it to them because they are following your instructions. That’s when the beneficiary sibling hires a lawyer and drags the trustee sibling into court. There are few things that destroy family relationships quicker than when one sibling controls the purse strings of another sibling.
- Lack of documentation.
Individual trustees very often do not have the tools necessary for accounting and reporting. They don’t always understand that a trust must account separately for the funds available for income beneficiaries from those for the remainder beneficiaries. I have seen individual trustees regularly commingle trust funds with their own personal funds. They do not always make copies of all bills or all deposits. I have also seen them regularly transfer funds between accounts making it difficult to track the funds or determine the source of the funds.
In all of these instances, lack of time, lack of skills, adverse effect on family relationships and lack of documentation, it ends up costing the trust more than if you would have hired a professional trustee in the first place. The old adage penny-wise and pound-foolish often comes true when appointing individual trustees.
By Matthew M. Wallace, CPA, JD
Published edited June 25, 2017 in The Times Herald newspaper Port Huron, Michigan as: Reasons to choose a professional trustee