Before appointing a trustee you should understand what a trustee does. A trustee, inter alia:
- runs the trust for the benefit of the beneficiaries
- acts in a fiduciary capacity and when acting in that capacity, has the ultimate duty imposed by law as to relationships between people
- acts as an agent
- is responsible for the preservation of the planner’s property, its growth with respect to income and capital appreciations, and its application to the beneficiaries
- should follow the written instructions of the trust planner
- has a responsibility to “read between the lines” and make decisions when there is no clear-cut alternative
- cannot speculate with the capital or the income it generates
- should exercise prudent judgment
- has power, accountability, and liability, all wrapped together in the role as agent.
The question as to who should be your trustee will arise when:
- a trust is created
- a trustee is disabled
- a trustee is deceased
- a trustee resigns or his office is terminated
Trustees can be individuals or corporations and individual trustees are usually family members, friends, or advisers of the planner.
Corporate trustees are usually trust companies or trust departments of commercial banks.
Can you be the trustee of your own living trust?
Many people are under the impression that it cannot be done. It can be done and it is highly advisable to ensure that you are involved in the decision making process. Furthermore, under trust law, it is quite permissible for you to be the donor, one of the trustees and a beneficiary of the trust all at the same time.
In the event of your disability or death, your trust should provide for a successor trustee who would take over that position from you. Is quite common to provide for a series of successor trustees.
You would also have co-trustees serving with you who can continue to carry out the trust instructions in your absence. Usually a trust planner names himself or herself to be a trustee and, if named, names his or her spouse as a co-trustee.
Designating successor trustees to you and or your spouse can be a difficult issue, and many people spend a great deal of time considering the solution. A method should be determined to ensure that your wishes, desires, goals and aspirations would be achieved and the successor trustee should be a responsible person whom you have confidence in. Usually close members of the family, such as adult children, parents, siblings, aunts and uncles are considered. If there are no close family members whom you would like to nominate, close friends are usually considered.
After the list of candidates has been determined, you should discuss the trusteeship with them. Successor trustee/s should not be nominated without their appointment first having been discussed with them. Some people might just not want the duties and responsibilities. If there are no successor trustees, usually the Trust Deed provides a mechanism for appointing them. If there is no such mechanism, they will be appointed in terms of the Trust Property Control Act.
Becoming or naming a trustee should be taken seriously. You should not accommodate a family member, friend, or client by accepting a trusteeship without giving careful consideration to what a trustee does.
It is difficult to find competent and willing trustees on a personal and corporate basis because trustees must work hard and are always held accountable for their actions. A trustee’s knowledge of the affairs of most trust planners is usually deficient. My experience suggests that people carry most of their affairs in their heads. Most spouses and children know too little about the family’s financial affairs.
Should you name children as your trustees?
This is often a wise choice. The important aspect to remember is that children like to be treated equally. Accordingly, if fewer than all of your children were to be appointed there should be adequate reasons for this to take place and the acquiescence of all of the children should be obtained if they are of an age that they are able to appreciate the importance of the appointment.
If you want to name as a successor trustee family member who is not good with money or investments but is trustworthy and personally close to the trust’s beneficiaries; in such instances, naming an accountant or corporate trustee can fill the gap of the individual’s weaknesses while still making his or her many strengths available to the beneficiaries. A combination of several individuals or professional trustees is beneficial to obtain a balance of qualifications and to have “trustees watching trustees” for the benefit of the trust beneficiaries. In the first instance you should consider your spouse and thereafter your children as co-trustees. One problem with choosing family members as successor trustees is that most people have never served as a trustee before and don’t understand what they need to do to accomplish your objectives. Therefore, it is important that you select an estate planning attorney who will help educate your successor trustees as to what will be required of them when they serve in that capacity.
Should you and/ or your spouse be the sole trustee?
I believe it to be a risky practice from a tax standpoint for there to be less than three trustees of the family trust and would strongly recommend that co-trustees be appointed from inception of the trust. This avoids the trust’s assets being included in your or your spouse’s estate for estate duty calculation in terms of Section 3 (3) (d) of the Estate Duty Act.
Furthermore, the surviving partner is usually at a loss in many ways and putting him or her in a position to make all the financial decisions alone, without any help, can be a burden and often results in poor decisions on the part of the vulnerable and bereaved spouse. The appointment of one or more co-trustees can relieve some of the burden of decision making.
Consider some of the advantages and disadvantages of personal and corporate trustees:
Advantages of personal trustees
- They will often serve for little or no fee
- They are free from corporate technicalities, which can slow down decisions and actions
- They are usually known and trusted by the beneficiaries
Disadvantages of personal trustees
- They often make decisions on an emotional basis and are not objective
- They may lack expertise
- They may not be sufficiently wealthy
- They may pass away, become incapacitated, become greedy or be sequestrated
Advantages of corporate trustees
- They act objectively and follow trust instructions without emotion
- Managing trusts is usually their business: they do it professionally day in day out; they have investment, tax, and estate administration expertise
- They don’t die or become incapacitated, and if they go out of business, their obligations will be assumed by another corporation
- They may be highly regulated by government agencies
- They have the resources to cover errors and mistakes
Disadvantages of corporate trustees
- They charge fees for what they do
- Because they are supposed to make decisions on an objective and unemotional basis, they are often thought of as being uncaring
- They are not always the best choice for an estate that consists mainly of immovable property and/ or family business
What characteristics should a good trustee have?
A good Trustee should:
- Be honest and trustworthy
- Have the ability to make and handle investments
- Be financially accountable for any mistakes he or she makes
- To the extent possible, be situated in the area where the beneficiaries and the assets are located
- Have good relationships with the beneficiaries
- Be likely to survive you
- Be someone who you feel confident will manage your affairs wisely
How do multiple trustees work together?
They can delegate to each other the tasks in which each has significant expertise
Who looks over the trustee’s shoulder?
If you have an unusual situation in which a trustee does not follow the rules or does not act in the best interests of the beneficiaries, anyone hurt by that trustee’s actions can ask the Master of the High Court to review what the trustee has done in terms of the Trust Property Control Act.
If there are more than one trustee, who controls?
This depends solely upon the terms of the trust. You can provide for a majority vote, or you can provide otherwise.
Trustees must invest in proven investment areas on a conservative and cautious basis. They should not knowingly attempt to achieve a return on speculative investments. There is little room for speculation on a trustee’s portfolio.
What kinds of questions should ask yourself when assessing potential trustees?
- Are they free of monetary problems of their own?
- Have they demonstrated financial managerial ability of their own?
- Do they have any history of substance abuse?
- Do they know the beneficiaries well?
- Are they reliable?
- Do they have the required specialized skill to manage your assets?
- Have they demonstrated problem-solving ability?
- Are they the right ages?
- Are they likely to be available when needed?
- Will they seek and utilize professional assistance when circumstances require it?
- Will they accept the appointment?
Trustees, especially professional trustees, charge an annual fee calculated at a percentage of the income earned by the trust property over a course of a year. However, there is a move towards charging a percentage of the value of the assets managed by the trustees. It is the percentage fee of the fair market value of the trust property as determined by the trustees. Corporate trustees usually have a minimum fee that will be charge regardless of the value of the Trust property. The minimum fee is a fixed amount. Competition in the market place dictates the fee structure. However, if extraordinary management services are provided, this may necessitate a special or negotiated fee. Some institutions also charge a termination fee.
Personal or individual trustees are not sophisticated in the manner in which they charge fees. Many negotiate their fees. Many provide their services on a gratuitous or quasi-gratuitous basis. Most do not charge enough.
Trustee’s fees are not, in general, a major concern to most clients, however, a trustee’s performance is a major concern of all clients.
DR MERVIN MESSIAS
JD (Juris Doctor) / BA, LLB (Wits) / TEP (Trust & Estate Practitioner) / MTP (Master Tax Practitioner – S.A)