Forbes – March 15, 2021

The most challenging decision an estate planner must make is who to recommend as a trustee for a client. Trusts execute the estate plan, and the trustee is the lynchpin of any trust.

The trustee plays multiple roles; a financial and ministerial role; they are responsible for the prudent investment of assets as well as administrative and executive duties of overseeing the trust; the role of consigliere to the family, a trusted advisor and counselor willing to argue with the client when needed, without ambition and giving dispassionate advice. Additionally, a trustee must be knowledgeable about the client’s personal and familial affairs, investment and business management, taxes, and administration. Above all, a trustee must be empathetic when dealing with the client and their family.

Some ultra-wealthy families form a private trust company from their single-family office. Limited to just one family, the private trust company is an institutional trustee that includes individual family members, friends, business associates and professional advisors on the board or committees. A private trust company can grow to offer services to other families, but then they tend to stray into the institutional trustee domain, with the ownership, and control, held by a family which may, like the stockholders of a bank, be tempted to sell out if the price is right.

The Pros and Cons of the Individual Trustee.

There are three types of individuals that are usually chosen as trustee – a family member, a friend or business associate of the client or a professional advisor.

A family member is most attractive to clients since they know about personal and family matters already, are empathetic, are personally involved, are often quite capable of handling matters and often have a fair degree of common sense. On the other hand, family members, especially of a younger generation, can be indecisive and insecure about making hard decisions, especially, where a beneficiary of the trust is failing mentally or physically. They can also be inexperienced in the management of business or real estate interests, unskilled in the administration of a trust; and, may hold biases about members of the family and either favor or discriminate some over others.

A friend or business associate also has personal knowledge of the family and especially of business matters and investments. They are also empathetic since they are often in the same situation as the client on the reasons the trust is created in the first place. Generally, a client can tell if the friend or business associate is hardworking and honest. They can just as well succumb to the temptation of speculating with the assets of the trust and play favorites among the family. If the friend or associate is of the same generation as the client, so they may not survive the client or be able to handle matters when required due to age or illness. Further, they often have their own business, investment and family matters so that they lack the time necessary to properly administer the trust.

For both the family member and the friend or business associate there is one other draw back – there is no way to collect if they are responsible for losses to the trust or the family, whether from neglect of malfeasance.

Another option is a trusted professional advisor as trustee. They have had a long-term relationship with the client and so are familiar with the client’s personal, family, business, and investment matters. They have proven over time that they are honest and hardworking and that they have the expertise and experience necessary to manage the trust. They too can succumb to the temptation to speculate or misappropriate assets or to act too conservatively to fulfill the client’s wishes. They are also mortal and so will grow old, infirm, or die before the term of the trust is over. Further, there is an inherent conflict of interest between their duty as a trustee, and their need to charge fees at a rate appropriate for a professional to charge on an hourly basis, which is excessive for the management of the trust. A professional advisor may feel that they can do it all, and end up not soliciting the skills and expert advice needed to manage the assets; especially when that is outside of their professional expertise.

The Pros and Cons of the Institutional Trustee

A bank or trust company, as an institution, can be a trustee. They are staffed by experienced professionals with expertise in administration and investment of trust assets. As an institution, they are in effect immortal since their existence and trustee are not tied to the life or ability of any one person. Generally, their goal is to provide objective advice. They are regulated at both the state and federal level and have established track records of administration and investment management. Their institutional nature, however, can be a weakness. They come to the position with no or little knowledge of the client’s personal, business or investment affairs. Decisions are made by committee, which is slow, and often a confusing process with little input or consensus from the family.

Although an institution, it is not unchanging. There is often a remarkably high turnover of staff at the bank or trust company. The individual trust office has many relationships, so often is hard to reach someone. Banks and trust companies are also subject to acquisition by other institutions who can make offers to the institution’s shareholders that are too good to pass up. These then consolidate administration and investment management away from the location that the client and family assumed would remain to manage their investments. The goal of these consolidated companies it to minimize their exposure to risk. Assets such as a family business, a summer house or farmland, may increase the exposure of risk to these institutions.

The Problem of the Fiduciary Standard in Entrepreneurial Families

One particular problem with either individual and institutional trustees is that they both are subject to a fiduciary standard. This standard requires the trustee to not speculate with the investments, to use proven and conservative policies in the administration of the trust, often is in direct contradiction of the entrepreneurial drive of the client. Especially, when the client is a founder of a successful business, and it is this entrepreneurial drive the client hopes to foster in the next generation. The cooperative, by being the repository of the client’s entrepreneurial legacy, can craft a superseding fiduciary standard that avoids stifling innovation and creativity based on a clear understanding of the client’s intent and an empathetic understanding of the client and the members of the family in administering the trust to the highest standard, but also doing what the client hoped to achieve when the trust is formed.

So, what is the right choice between an individual trustee and an institutional trustee? The answer is use both. This requires that the duties and responsibilities of the trustee be divided between individuals and an institution in roles as administrator, investment manager, and distribution manager and as a general trustee. This allows the client to select individuals and institutions that have the specific level of expertise, experience, knowledge, and empathy required. What is key in having multiple trustees is to have all of them collaborate to serve the best interests of the client and the family in accord with the client’s intent. These multiple individual and institutional trustees will not work well together unless there is a cooperative structure to ensure that they do so and are following the client’s intent.

By Matthew Erskine, Contributor

This Forbes article was legally licensed through AdvisorStream.

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