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What Does a Trustee Do?
Investment management with a corporate fiduciary is different.
The will began with the words, "I, James Brown, also known as the 'Godfather of Soul'..." and went on to divide the singer's estate among his six children born before he met Tomi Rae Hynie, the mother of his seventh child. There are lingering questions over the legitimacy of Brown's marriage to Hynie, and possibly over his paternity of the child as well. Hynie has brought a lawsuit to resolve these questions. As it turned out, the will did not control the disposition of the most valuable elements of Brown's estate, including his mansion in Beech Island, South Carolina, and his music royalties. These are owned by an irrevocable trust created by Brown in 2000, evidently established to protect his assets. Reportedly, the trust will provide education funding for Brown's grandchildren and for "needy children". His children are not direct beneficiaries of the trust. Brown's children filed a lawsuit to replace the trustees of the irrevocable trust, alleging that the assets had been mismanaged and dissipated. The trustees are Brown's attorney, his business manager and a former South Carolina magistrate. At this writing, the outcome of the suit is uncertain, but because the trust operated with Brown's approval during his life, the children will have a very difficult burden to overcome to change the arrangement. The fact that the children filed the lawsuit does suggest, however, that Brown failed to share with them the key elements of his estate plan. Not a good idea. Family harmony will be better served if beneficiaries are not taken by surprise. If a third party trustee will be involved, it's always a good idea for the beneficiaries and the trustee to be acquainted.
Why You Might Choose a Trust Plan
Trusts can be used to achieve some or all of the following objectives:
• Provide lifetime financial protection for a surviving spouse.
• Establish inheritance management for minors and incapacitated or disabled family members.
• Protect assets from creditors.
• Reduce or eliminate transfer taxes.
• Increase financial privacy and confidentiality regarding wealth distribution.
• Implement a program of philanthropy.
• Protect an estate plan from claims by disgruntled heirs.
• Provide complete financial management in the event of your own incapacity.
Look For These Qualities
Whatever the reason for creating your trust, the next question is crucial: Who should you choose as your trustee? Who has the qualifications to see to it that your trust plan will succeed? Where would you look for the right trustee? James Brown evidently picked advisors in whom he had confidence, and who brought to the job an intimate familiarity with his business affairs. Typically, a trust grantor is deciding between a corporate fiduciary (a company that has been granted the legal right to act as a trustee) and an individual, such as a family member, friend, or business associate. Factors that should be considered in evaluating a trustee include:
Judgement and Experience. Inexperienced new trustees may dissipate the trust assets, or make administrative mistakes that result in delay or other problems.
Impartiality. A trust typically has current income beneficiaries and future or remainder beneficiaries. The interests of both types of beneficiaries must be balanced carefully. Conflicts need to be resolved by a trustee that all the beneficiaries can respect.
Investment Sophistication. The trustee should be able to increase returns or reduce portfolio volatility, and must be able to diversify the portfolio.
Permanence and Availability. Many trusts are expected to last a decade or more. Corporate trustees have the advantage of perpetual existence.
Sensitivity to Individual Beneficiaries' Needs. Understanding the individual needs of trust beneficiaries is very important, and on this issue many will assume that the friend or family member has the advantage. Even so, a corporate trustee might be brought in for an objective voice and to prevent unreasonable distributions.
Accounting and Record-keeping. Detailed trust records are required, and few individuals are equipped to handle this chore properly.
Fees. There is a chance that the fees charged for trust administration will be lower when a friend or family member is named as trustee. However, when a trustee is serving for little or no compensation, it becomes hard to give the trust the attention that it deserves. In the case of James Brown's trust, the trustees fees are likely to be substantial -- that's why the incumbents resisted being replaced. At the same time, they may bring to the job of trusteeship a familiarity with the unique assets in the trust that makes their fees reasonable. In the more usual case, the trust assets consist of ordinary investment assets, such as stocks, bonds, or mutual funds. In that situation, a corporate trustee is likely to be a very cost-effective alternative. Management at Mechanics Bank, November 2006 issue
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