SELECTING TRUSTEES NOW, BEFORE A CRISIS
The person in control of the trust is called the trustee. He is responsible for management, making all decisions, and
managing the assets. Often, he has exactly the same powers as if he were acting as an individual. He may have some limitations to his power described in the trust. A trustee can decline to accept the original appointment. However, after acceptance, a trustee can't resign unless permitted by the trust documents or by a court ruling. It's fairly common to have co-beneficiaries, co-trustees, successor beneficiaries and successor trustees.
Co-trustees normally must agree on all decisions, therefore allowing either to have veto power. This can create conflicts, unhappiness, and other problems. We recommend that singular individuals have control at any one time, if possible.
Otherwise, try to provide for a majority decision by appointing unequal numbers of trustees or appoint a tie-breaker to resolve conflicts.
In some trusts, the same individual can be creator, trustee, and beneficiary. Thus, he or she has complete control and benefit of the assets, even while the assets are owned by the trust. Even if the creator can't fill all the roles, the trustee and beneficiary frequently are one and the same. If it is of primary intent to use the trust as a protector of assets. It is best if all positions are NOT filled by the same person.
SELECTING THE TRUSTEE
You can see that the key controller is the trustee. Once the trust is in place, the trustee makes all decisions. For a trust to work as you'd like it to, you need to pick a reliable trustee.
Can you act as your own trustee? Sometimes, especially if you set up a revocable trust. However, with most irrevocable trusts, where you want tax and asset protection advantages, you should name someone else as trustee, to establish separation of control.
Moreover, even if you act as trustee of your own revocable trust, you'll need to name a successor trustee, in the event the original trustee becomes unable to serve.
When you choose a trustee or successor trustee, you want someone with integrity, whose judgment you trust. If that someone has some financial ability, so much the better. But, it's not a necessity. Most of all, you'll want a trustee who'll have high concern for the trust beneficiaries in case unforeseen situations arise.
Often, you won't find such a paragon to act as trustee. That's why many trusts appoint co-trustees. One trustee might be a family member, who'll be familiar with the personalities involved, while the other might be a financial institution (for example, a bank) or an individual who's comfortable handling money.
Another approach is possible if you have a financial advisor you respect (your broker, for example) but whom you don't want to name as trustee. In this case, you might name a relative or friend as trustee while naming your broker as the trust's investment advisor. You could either name the broker formally in the trust documents or simply make a nonbinding recommendation to the current trustee.
Patience and prudence. No matter who actually makes the investment decisions, the trustee has a fiduciary responsibility to the beneficiary.
The trustee is responsible to the beneficiaries--say, your widow and your two minor children. Fiduciary responsibility is a huge concern:
Errors could result in a lawsuit or damage to the beneficiaries.
The basic rule is that a trustee must invest trust assets as a "prudent person" would, under the circumstances. That doesn't mean all the assets must be invested in Treasury bills or Certificates of Deposit. In fact, being overcautious can be imprudent. In one case, a trust that invested solely in money market funds was judged imprudent because the return was too low.
On the other hand, fiduciaries clearly are not expected to speculate wildly with trust assets. Even if you, the creator, are the kind of investor who likes to take risks, the trustee is not supposed to follow in your footsteps. If the trust takes effect after your death, for example, for the benefit of your heirs, the trustee may act prudently by liquidating most or all speculative investments such as limited partnerships, oil and gas deals, pink-sheet stocks, options positions, and so on. New York Stock Exchange stocks, investment grade bonds, real estate, and cash equivalents are usually the most appropriate trust investments.
Although no hard and fast rules apply, prudent investing tends to mean holding a diversified portfolio.
Leave an escape hatch. One trap to avoid is locking your beneficiaries into a specific money manager, such as a bank trust department. What if the bank disappears, merges, or doesn't perform well? Your heirs may not have any method of changing trustees.
Unhappy trust beneficiaries can sue for a change in trustee, but such lawsuits usually fail unless severe misconduct can be shown.
Regardless of the outcome of the lawsuit, the bank usually will pay its legal fees out of the trust fund.
The solution is to give someone else leverage. A co-trustee, perhaps a relative, might be given the power to change financial trustees. You might even give the trust beneficiaries the right to change trustees, perhaps selecting from a list of acceptable institutions mentioned in the trust documents.
Caution: If the trust beneficiaries can change trustees or invade the trust principal, the trust may be subject to income and estate taxes or eliminate asset protection. You need to limit the beneficiaries' ability to get at the trust principal, or you are giving "trustee-like" powers to the beneficiary.
* When creating a trust, you need to carefully spell out the identities of the parties, their roles and the assets you mean to transfer to the trust.
* Control can initially be retained by the creator, especially when first getting comfortable with the concept and use of trusts.
* Although you could give up control of assets, to gain tax advantages and asset protection, you still can continue to exert
considerable influence over trust property.
* Trusts generally have one or more beneficiaries and one or more trustees. Someone can function as both trustee and beneficiary.
* The trustee, as asset manager, is the absolute controller, so considerable care should be taken in selecting trustees, co-trustees, and successor trustees. A lifelong friend may be more trustworthy, experienced, and better than trusting or empowering relatives.
* Trustees have a fiduciary responsibility to invest the trust assets prudently and CANNOT legally convert assets to others not named as beneficiaries.
* When drawing up a trust, get professional advice from many sources, even if that means you end up spending substantial amounts.