In what some are calling “The Great Wealth Transfer,” experts predict that boomers will give about $68 trillion to their heirs over the next 20 years. And this intergenerational transfer of wealth is not stopping there. Almost $200 billion was raised through SPACs from 2019 to 2021. While the actual statistics of how much money went directly to millennials from the SPAC and IPO boom is unknown, it’s safe to say that it’s a remarkable amount of additional wealth transferring to the next generation.
As a result, wealth owners are spending significant time thinking about how they want to transfer their wealth and to whom. Like the generations before them, they seek plans that focus on their family vision, including their legacy, philanthropic goals, and their adult children and other potential heirs. However, this new generation of wealth owners also holds more complex assets, such as alternative assets like cryptocurrencies, that are making wealth transfer discussions and structures more challenging.
The selection of a trustee is critical to the estate-planning process. This article will examine the steps you need to take when choosing a trustee.
What is the role of the trustee?
A trustee is a person who manages the assets held within a trust according to the trust owner’s (grantor’s) instructions. Responsibilities can include recording income and expenses, paying taxes on any income, and distributing funds to beneficiaries.
The trustee must be someone who can put their personal interests aside and perform their duties according to the beneficiaries’ best interests. While professionals such as lawyers, accountants, and financial advisors can carry out these duties, many of today’s families seek a trustee who is familiar with their goals and understands their unique family dynamics.
Therefore, the next step is to outline the roles and responsibilities of your trustee’s position. These powers will be outlined in the trust documents. But the implementation of them can be complex.
Questions to ask when choosing a trustee
Many wealth owners first think of a close friend or family member to handle the responsibility of being a trustee. Keep in mind that any trustor’s goal is to protect their legacy. To help you, as wealth owner, make the decision that is best for the purposes of your trust, here are some basic questions to consider:
- Can I fully trust this individual?
- Do they understand the enormity of the job?
- Will they act in the best interest of my beneficiaries?
- Do they understand the complexity of the assets?
- Do they share the same understanding of my philanthropic goals?
- Can they make difficult decisions?
After you have narrowed down the field of candidates, your next step is to make sure the person you are considering for the job of trustee fully understands their responsibilities. Here is another set of questions that will help you determine the skill set and commitment level of the trustee:
- Are they willing to do the required tasks?
- Do they have the time to administer the trust?
- Do they have the level of financial competency needed to make complex decisions?
- Are they organized enough to avoid making mistakes?
- Can they navigate the position of judge versus advocate?
- Can they put any personal biases aside in their decision-making?
What protections exist for trustees?
Now that you have chosen your trustee or trustees, you may be wondering what protections they have under the law. In other words, can a trustee be held personally liable?
The answer is yes, and that is why the trustee must make all decisions in managing trust assets and on behalf of the beneficiaries. Trustees can protect themselves by fully understanding the instructions outlined in the trust instrument and keeping detailed, accurate records of all trust transactions and distributions.
Some people may question whether the trustee should be indemnified with trust assets. The real question is not should the trustee be protected but how.
The need for legal protection of the trustee is like the need for the legal protection of a board of directors. Boards of directors are indemnified because shareholders want experienced and knowledgeable decision-makers. If there is discourse, shareholders want the board to make impartial decisions with the knowledge that they are supported.
Similarly, as the wealth owner, you stand behind your choice of trustee and protect them as they make decisions that reflect their commitment to implement your wishes.
How is the trustee supported?
The protections afforded a trustee are like any other corporate opportunity—indemnification from trust assets, insurance, and a combination of both.
Indemnification from the trust assets: The trust instrument should have an indemnification agreement that is consistent with state law. Generally, indemnification agreements will indemnify the trustee for acts, errors, or omissions, except for gross negligence and intentional or willful misconduct.
However, many fiduciary litigators will allege gross negligence or willful misconduct to delay indemnification. That will put the trustee’s assets at risk. Therefore, an added level of protection is advised.
Trustee liability insurance: That added level of protection comes in the form of trustee liability insurance. Trustee liability insurance is a type of errors and omissions insurance that is also known as professional liability insurance.
This type of insurance will provide defense and damages subject to the policy’s limit of liability and terms, conditions, and exclusions. If the insurance policy is written correctly, there will be an advancement of defense costs until the final adjudication of the complaint. Also, the policy will provide a competent defense of a claim, and the policy will help protect trust assets.
As you can see, the process of choosing and protecting trustees is very similar to the way you select and indemnify your board of directors.
The selection of your trustee is a decision that requires careful thought and planning. After all, it is this individual (or individuals) who will be carrying out your legacy. We urge you to choose carefully based on your needs and their skill set, and then protect them so they can focus on prudent, independent decision-making.
If you have further questions about the role of the trustee or the process of choosing a trustee, please let your Woodruff Sawyer representative know. We will be happy to assist you as you make this critical decision.
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