(This is our continuing blog on estate planning, business and succession planning, probate and trust administration, and real estate law. Our focus is on the laws of Michigan and Florida, where we have offices in Oak Park and Grand Rapids, Michigan, and Fort Myers and Naples, Florida.)
As I emphasized in First Steps For Estate Planning, the process of identifying and securing the services of a willing, able, and dependable trustee is a critical first step in an estate plan that includes a trust. Because of the work involved, potential liability, and possible family tension that go along with serving as a trustee, your chosen trustee may be reluctant to serve. But there are things you can do when drafting and setting up your estate plan to make the job more attractive, and to increase the likelihood that your trustee will successfully, and happily, achieve your hopes and long-term goals for your estate. While state laws provide for some of these beneficial provisions even if not included in the trust document, it is better to expressly include them not only to encourage your chosen trustee to serve, but to add clarifications or enhancements where appropriate.
There are many situations where naming a professional/commercial trustee makes sense. I plan to write a separate article on that topic soon. But in this article, I am focusing on those situations where a family member or friend has been chosen.
What’s in It for the Trustee?
There can be significant work involved in serving as a trustee, including record keeping, tax filing, property management, hiring and working with advisers, and formally and informally communicating with beneficiaries. Family members or friends who agree to serve as a trustee are rarely looking to turn a profit. But it is reasonable for a trustee to at least want to avoid losing money. Appropriate out-of-pocket expenses are clearly reimbursable. In addition, an individual trustee, even one with no prior experience, is entitled to reasonable compensation under Florida and Michigan law, unless the trust document provides otherwise. So, the advice here to encourage your chosen trustee to serve is don’t “provide otherwise”, and instead, expressly provide for compensation.
Many family member trustees will choose not to take compensation and will donate their service to the beneficiaries. Trustee compensation will be taxed as income, and where the trustee is also a beneficiary, the trustee might prefer to just take their share of the trust later, without it being reduced by prior taxable compensation paid to them. But a provision allowing for at least “reasonable compensation” should be in the trust to encourage the trustee to serve. If the trustee has relevant skills or professional experience, the trust or a separate contract could expressly provide for a specific rate of compensation in line with what similar professionals might charge in the marketplace.
In addition, if a family member or friend who serves as a trustee is an attorney, accountant, financial planner, or real estate agent, for example, it will often make sense for them, or someone in their firm, to provide services to the trust. These professionals are often chosen as trustees because of their relevant skill and experience. The trust should expressly permit the trustee or its company to provide those services to the trust. Of course, there is still a duty of loyalty and good faith that requires the trustee to only receive reasonable, market rates for any services provided. But a clear provision authorizing such arrangements can encourage service and discourage a disgruntled beneficiary from making an issue of any business benefit that might be realized by the trustee.
Consultants and Advisers
It is unlikely that any individual trustee can be successful without enlisting the help of consultants and advisers, including attorneys, accountants, and financial and real estate professionals. A well-written trust will include provisions expressly authorizing the trustee to hire consultants and advisers. Also helpful to encourage service as a trustee is a “limitation of liability” provision. This provision makes it clear that the trustee may rely on the advice of appropriate consultants and advisers and will not be liable for any damage suffered by the trust due to any mistakes of the advisers. Of course, the trustee will still be responsible to diligently confirm that a chosen adviser is qualified. And the trustee must monitor the adviser’s work and take action if there is any evidence that the adviser is acting improperly. But expressly empowering a trustee to rely on others, and limiting a trustee’s liability to willful acts or grossly negligent conduct of the trustee, should help to encourage service.
In addition, if warranted by the amount or complexity of trust property, you should identify and establish relationships with consultants and advisers now. Then, after your incapacity or death, your trustee will already have important advisers in place who are familiar with your assets and situation.
A trustee does not have to serve alone. If the trust property is extensive or complex, or if you like the idea of combining the personal involvement of a family member with the administrative and professional experience of a commercial trustee, you might name co-trustees to work together and share the workload. Even if the trust is not set up to initially have co-trustees, it may be encouraging to the individual trustee if they have the authority to later appoint a co-trustee. This can be helpful if circumstances change in the future, or in some cases to address possible adverse tax consequences for the trustee when the trustee is also a beneficiary under the trust.
Some attorneys are opposed to using co-trustees because it can add another layer of potential conflict if the co-trustees do not agree. But provisions to deal with potential deadlock, delegation of authority between co-trustees, and dissent can be added whenever co-trustees are appointed or permitted.
One of the important and often demanding tasks for a trustee is giving notices and accountings to “qualified beneficiaries.” In some trusts, there are many “qualified beneficiaries”, which is a group that often includes more than just the current beneficiaries, and includes future, or contingent beneficiaries. Keeping track of the whereabouts of all “qualified beneficiaries” can be difficult. Beyond the logistics of providing required notices, some information that is required by law to be reported may not be appropriate or desirable for disclosure to contingent beneficiaries. In Florida, the trust can appoint an individual as a “designated representative” to receive notices on behalf of all “qualified beneficiaries.” Including a “designated representative” in the trust can make the trustee’s job easier when it comes to reporting and providing notices.
Flexibility to Make Changes
You may have a willing and able trustee in place, but if the beneficiary’s or trustee’s circumstances change, or the law changes, you might saddle your trustee with an unworkable trust provision or document. A trustee may appreciate flexibility that can be provided through amendment authority, “decanting” authority (which is basically moving assets from one trust to another, more favorable, trust), or even termination authority. You may be hesitant to grant such broad authority because the trustee could circumvent your estate plan. Your willingness, or unwillingness, to grant such authority highlights again the importance of choosing the right trustee. But we cannot predict the future and plan for all possibilities, so building in flexibility by providing the trustee with some important authority can be helpful, and improve the chances of a reluctant trustee accepting the role. To the extent giving extremely broad authority is a concern for you, limitations and criteria can certainly be added to any authority to preserve important parts of your estate plan.
If All Else Fails
Despite your best efforts, a chosen trustee might decline to serve, or might need to resign for personal reasons that have nothing to do with the trust document. To encourage service and reduce any bad feelings or guilt for the trustee if that happens, you should add provisions that make resignation easy and the appointment of a successor trustee as seamless as possible. If you run out of listed, successor trustees, you should include a clear procedure for appointing a trustee which might involve election by a majority of current beneficiaries. Such a provision can avoid the expense and effort of going to court. To address any concerns you have that an unqualified or unfavorable person might be elected, you can limit eligible elected trustees to commercial/institutional trustees, or to persons from a certain profession or with a certain level of experience.
Accepting the Role of Trustee
Before accepting the role of trustee, a prospective trustee should carefully consider the trust documents that will govern their actions, the assets that they will be responsible to manage, and the family relationships and dynamics with beneficiaries that will affect their work as trustee. The trust documents you prepare and the work you do before the trustee steps in can go a long way to encourage their participation, and make their service easier and, hopefully, more productive.