Sometimes the obvious choice is just wrong. That’s where education comes in. Thomas M. Fafinski educated us in a recent visit to the Financial Fortitude radio show. Tom is co-founder of Virtus Law.[i]Besides practicing and teaching law, Tom is an author and wrote a book titled The Ultimate Guide to Estate Planning.
Our visit addressed factors trust grantors should consider when appointing trustees. We aren’t legal experts, but we took pretty good notes. If you need to appoint trustees or have questions, we encourage you to use this post as a starting point before seeking advice from a legal expert. You can reach Tom and Virtus Law by the source listed in the endnotes.[ii]
Many grantors make the “obvious choice” appointing a trustee to manage the trust after the grantor’s death: Grantors want somebody they know well. They want somebody with the best interests in mind for all trust beneficiaries. The “obvious choice” for the job is an adult child or another dependable family member. However, Tom says by thinking about the trustee role as four distinct functions, grantors might want to seriously consider different trustee appointment choices. The functions are administrative, investment, distribution, and protector.
1. The administrative function handles mail, tax returns, and related tasks. These tasks are straight-forward, but they require diligent attention and some expense.
2. The investment function requires the most time, skill, and devotion. When one person assumes all four trustee functions, they receive no compensation, and remaining beneficiaries do no work. What if the trusted family member makes investment mistakes or markets lead to unfavorable outcomes? How will beneficiaries respond? You don’t want beneficiaries to be worse off with your wealth than they would have been without your wealth. The alternative to assigning a family member assigns the financial adviser who helped you grow and preserve your wealth. Besides relieving a family member of the responsibility and consequences of unfavorable outcomes, beneficiaries can learn about investing and discover your values in the process.
3. The distribution function can be easy or complicated depending on the trust’s distribution terms. If the trust prescribes a lump sum distribution or periodic distributions, account custodians handle the work simply on the authority of the trustee. However, if distribution terms include contingencies, they force the trustee to make judgments. For example, consider a grantor who wants their beneficiaries to rely on their own wealth-building ability and not just trust account distributions. Terms might require beneficiaries to earn at least, say, $75,000 per year. The contingency forces the trustee to seek income documents from beneficiaries. It gets complicated and potentially disruptive to relationships between beneficiaries.
4. A trust must be a living document because its terms can affect beneficiaries for years, even generations. Changes in law and unforeseen circumstances can bear on the trust’s capacity to serve grantors’ objectives. Therefore, trustees must act to protect beneficiaries. They can go to court to change trust terms when things change. Trustees must care about law changes and know when they should act to seek changes.
Nobody gets excited about making plans for their death, so people procrastinate about wills and trusts. Look, it wasn’t raining before Noah built the ark. But the rains will come sooner or later, so maybe today is better than tomorrow to start committing plans to paper.
[i]The Virtus Law website is https://www.virtuslaw.com/, and https://www.virtuslaw.com/attorneys/thomas-fafinski/has more information about Tom and his law practice.
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