5 Things Estate Planners Should Know About Independent Trustees

Part of the practice of estate planning is identifying when clients and their families could benefit from the help of other services and professionals: We see a need and we introduce people – accountants, lawyers, insurance agents, financial advisors, counselors, advocates, and so on to fill those needs. We do this literally all the time.

Introducing Trustees is no different, but there is confusion about how, when, and where to introduce the independent trustee.

1.   We need an independent trustee, now.

The trust instrument calls for a corporate trustee or someone who is independent and not related, or subordinate to a beneficiary (See Sec. 674 of the Internal Revenue Code). Yours is not to wonder why; the trust makes it mandatory. We simply need to locate a suitable trustee, and we need to do so fairly quickly. (More on how to select a trustee in a future post.)

2.   A client is trying to protect assets from potential predators or creditors.

You should suggest an independent trustee at the time the trust is drafted. The role of the trustee, in this case, is to show independence of judgment and to resist what would otherwise be the conflict of interest on the part of the grantor or the appearance of a conflict on the part of a member of their family or close circle from making a distribution to them – or being ordered by a court to do so.

3.   The grantor has passed on and what was hoped to be calm waters are suddenly turbulent.

One or more of their beneficiaries is staring down the barrel of debt collection, divorce, recent disability, destructive spending, or substance addiction, or may be in dispute with their siblings or other heirs (some of the “Killer Ds” – that kill an inheritance). You can help ID the problem and propose an independent, objective person to see the beneficiaries through the difficulty.

4.   A beneficiary is unable to be their own trustee, due to a disability or a lack of responsibility.

In this case, an independent trustee can assist, either as a sole trustee, or as a co-trustee to look after the books, and play a deciding role on major distributions. Family members can need this backup trustee when making tough calls. They may lack the objectivity or the fortitude to come through. Let the family be family, and not strain the difficult relationships any further.

5.   Identify opportunities for multigenerational wealth building.

Over the course of 30 or 60 years, i.e. one or two generations, wealth can build tremendously. It’s presumptuous and even naive to think that family members can govern their own inheritance over such a span of years without them spoiling the purpose of the wealth – to be there for rainy days, for expensive needs, for impacting the good of the family and community.

Family members are mostly interested in the immediate enjoyment of the funds they’ve inherited. They tend to put their concerns on the front burner, on the highest flame, for quick consumption. In fact, the trust should be in a slow cook mode. This is not glamorous, not exciting. It takes patience. But at the end of the day, the slow cook produces a wholesome and hearty meal for all.

All too many clients build wealth during their lives by hard work, savings, a bit of luck. They want their children to do the same, only to find that their children are likely to sell off the holdings, to live higher off the hog, so to speak. These same clients, we see, year in and year out asking us how they can make their money last until their dying day. And yet they are not realistic about how their children will handle the wealth. The children will sell it all off and spend it within a few years, as though they’ve won the lottery.

But these families are missing a golden opportunity to build wealth for their grandchildren, and possibly beyond. The discipline it takes to do so includes hiring a unique professional – an independent professional trustee is a partner, a coach, and a regulator of the wealth. The trustee will enforce the discipline to allow the trust corpus to build over time. It should be invested in equities and not just bonds and should spin-off, usually no more than 3% to 4% per year in distributions. Even if the child gets this concept, I can almost guarantee the grandchildren will not.

Our own rule of thumb is that if there are at least $1m dollars to leave per beneficiary, it should be urged upon the client to consider the merit of the long-term trust. In this age, we have to choose between DIY and hiring professionals. This is not a DIY situation for your family, I would tell the client. It can be your place to advocate in any longer-term trust for the role of an independent trustee.

In other posts, we’ll talk about how the independent trustee can be a partner, rather than an overlord. We’ll also talk about the various types of independent trustees and the merits of each.