Staying in the know Featured

7:00pm EDT November 25, 2007

One of the most important decisions when creating a trust in a will or a stand-alone document is who to name as trustee. The decision often starts with whether to name a nonprofessional (a family member or a friend) trustee or a corporate trustee. While it is comforting to have friends or family members act as trustees because you know and trust them, they are often unskilled in managing trusts. Corporate trustees, on the other hand, are trained in the nuances of trust accounts and will probably be around for a long time. They charge a fee, but, at the same time, they are not likely to let emotions influence their decision-making, like a family member might.

“Being a family trustee can be an enjoyable and rewarding experience, but trustees need to be aware of their responsibilities and, more importantly, stay on top of the rules and regulations concerning trusts and estates,” says Carol Cantrell, a shareholder of Briggs & Veselka Co.

Smart Business spoke with Cantrell about family trustees and the top things they need to know in order to properly manage estates.

Of what laws should family trustees be particularly aware?

A hot topic today is the Uniform Prudent Investor Act (UPIA), which has been adopted by about 46 states. It requires a ‘modern portfolio theory’ or ‘total return’ approach to the exercise of fiduciary investment discretion. This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Thus, investment performance is measured based on the entire portfolio, rather than individual investments.

More specifically, the UPIA requires the trustee to diversify the trust’s investments, unless the trust agreement specifies otherwise. No category or type of investment is inherently imprudent. Instead, suitability to the trust account’s purposes and the beneficiaries’ needs is the primary determinant. As a result, junior lien loans, investments in limited partnerships, derivatives, futures and similar investment vehicles are not imprudent per se. But while the fiduciary is now permitted to develop greater flexibility in overall portfolio management, speculation and outright risk-taking is not sanctioned by the rule either. For that reason, a fiduciary is encouraged to delegate some or all of its investment management functions if prudence dictates.

What are the trustee’s core responsibilities?

Trustees must remember that they hold title to someone else’s assets, and they must carry out the instructions in the trust agreement. They cannot mix trust assets with their own — they must keep separate checking accounts and investments and may not use trust assets for their own benefit. Trustees must treat all trust beneficiaries impartially.

What else does a family trustee need to consider?

The trustee should review the will or the trust agreement for any special instructions given by the settlor, or creator. Did the creator want the trustee to be aggressive or hold onto assets? What kind of investment strategy did he or she suggest?

Another consideration is assets that may have emotional significance, such as a ranch that has been in the family for generations. A trustee may be tempted to sell it in order to diversify. But, the trustee must temper that decision with the asset’s special significance to the family and a host of other factors, including the impact of taxes, inflation and the special concerns of the family. Trustees also need to keep books and records, file tax returns, report to the beneficiaries and control costs.

One of the trustee’s biggest challenges is balancing the competing interests in the assets among the beneficiaries. For example, a trust agreement may require the trustee to pay all the current income to one beneficiary, typically the surviving spouse, and pass the remaining assets to another group of beneficiaries after the primary beneficiary dies. Thus, remaindermen are ‘waiting in the wings’ for what’s left when the income beneficiary dies. The remain-dermen typically favor investing the trust assets for maximum growth and minimum current income. However, the current income beneficiary prefers high income producing assets, such as corporate bonds that have limited growth potential. Striking a balance between the two classes of assets and beneficiaries can be difficult.

When is it a good idea to hire a corporate trustee?

A good rule of thumb is that estates under $1 million in assets can safely invest in mutual funds without a professional adviser or trustee. But when a trustee is responsible for larger sums of money, professional help is highly recommended if the trustee is not experienced in investing. In addition, naming a professional trustee may be wise when litigation is imminent, such as when a will may be contested.

CAROL A. CANTRELL, CPA, JD, CFP, is a shareholder of Briggs & Veselka Co. Reach her at (713) 667-9147 or ccantrell@bvccpa.com.