As the person who clients rely on to provide sound advice and direction on family and business matters, and as someone who shares and understands their views and perspectives, it is natural for clients and their accountant as trusted adviser to develop a personal relationship that extends beyond their professional one. As an extension of this relationship, it is common for a client to name his accountant as a trustee in his estate plan. The client wants the trustee to guard a host of goals and dreams that go beyond the basic preservation of assets and wealth.
The client/donor believes that his accountant as his trusted advisor understands him; that he has the wisdom to incorporate the donor’s most important values, spoken and unspoken. However, the dual responsibility of the advisor/trustee can blur the parameters of those roles, and may have legal, financial, and psychological ramifications. Indeed, the blurred or hybrid nature of the advisor/trustee’s role offers advantages and disadvantages, risks and opportunities.
When the client becomes disabled or dies, the accountant serving as trustee has fiduciary responsibilities to the trust and its beneficiaries. Even though the advisor/trustee should give credence to the founder’s intent, the advisor must now switch his loyalty from the founder to the trust, where the standard for decision-making is significantly different from that of trusted advisor.
The founder can do anything he wants with his own assets, his own business, and his own money. He can take risks. If his net worth or income declines, it’s his responsibility and he deals with the consequences. When the advisor takes over as trustee, the problems exacerbate. As a fiduciary, the advisor cannot take the same risk – it’s not his money, his assets, or his income. As trustee he is obligated to preserve the assets for the beneficiaries. He therefore cannot act in the same role as the founder, or even in the same role he had as the trusted advisor to the founder.
For example, the founder may not operate his business based solely on profitability. He might make decisions for other reasons – to employ friends, keep older employees who are no longer productive but who were loyal to him during his lifetime, or operate a division of the company for fun, regardless of the economic consequences. The problem is intensified, however, if one of those non-productive employees is a family member who may also become a beneficiary of the trust. When the trusted advisor takes over, he cannot maintain those decisions or take those same risks.
The combination of coping with the disability or death of a friend and significant client, switching roles, understanding the risks, and navigating the family’s issues is a Molotov cocktail—and often where the trouble begins. I have previously written about the hidden psychological traps that go along with this responsibility. This column is focused on the practical provisions within the trust document that the advisor should review and be comfortable with before taking on the role of trustee. (And a preliminary point worth noting is that even if you are nominated as a Trustee you are not liable until you accept the office so if every bone in your body is telling you not to proceed decline the position; once you accept the position you are in line of liability. Should you decline before serving you have no liability).
Right to Resign and Method for Appointing a Successor Trustee – Life is a movie, not a snapshot. While it may seem like a good idea now to serve as trustee, that may not be true in five years. You may end up in conflict with a beneficiary, you may face illness, or a life changing event such as divorce that takes much of your time and energy, or you may switch jobs. At some point, serving as trustee may not be right for you. When reviewing the trust document, determine what it says about resignation and your obligations should you do so. Do you have a responsibility to appoint your successor? Who has to approve it? What if there is disagreement among the beneficiaries? If you discuss this with your client while the trust is being drafted, your input may be important. You may ask the client to provide you with a list of persons or institutions that he would consider suitable to carry on. The client may have specific thoughts about who is qualified to take that role and include those parameters in the document e.g., independent trustee (not related to donor or any member of his family), trustee with a certain number of years of experience, or a certain amount of assets under management.
Indemnification Clause – Carefully review the duty to defend and indemnification clause – most trusts contain a standard one. State law provides default protection. If there are risky assets in the trust, or obvious issues with difficult beneficiaries, it is wise for the trust document to be clear about how the trustee will be indemnified and defended. For example, a clause that limits the trustee to gross negligence only may make sense.
No-Contest Clauses – Determine if there is a no-contest clause, which means that if a beneficiary challenges the terms of the trust or the way in which it is operated, that beneficiary’s rights are impaired. A trust document that includes this type of clause can be a signal that stormy waters lay ahead.
Distribution Language – Every trust has language that specifies the standards by which the trustee may distribute income and/or principal to the beneficiaries. The trustee should be clear as to what those distribution standards are and how to implement them. If possible, ask for clarification as to what the intention is and have a mission statement prepared that sets forth both the goals and objectives. These guidelines, although precatory, can be useful to both the trustee and the beneficiaries when the trustee is exercising discretion.
Actions of Trustee: Unanimous or Mandatory – If there are co-trustees, review the document to determine if decisions are to be made by unanimous or majority action. If the document does not specify, state law will have a default provision to that effect and should be reviewed. This can be particularly important if difficulties lie ahead. It can also be important to understand how transactions (once the underlying action has been determined) are to be effectuated – in other words how many signatures are necessary. The document should be reviewed for the power to delegate administrative or ministerial tasks.
Authority to Hire Advisors and Experts – Review the document to determine what authority you have, as trustee, to hire the standard advisors such as your own attorney (in your role as trustee), accountants, and investment professionals. If there are unusual circumstances, such as a beneficiary with special needs or substance abuse issues, review the trust document to determine if you will have authority to hire mental health professionals and related caregivers. It may also be advisable to have broad authority to hire others, such as private investigators.
Investment Language – As fiduciary, you have an obligation to invest the trust assets prudently. Review the trust to determine if the trustee is to make allocations between income and principal. If the trust holds risky assets such as a closely held business or real estate, review the language to be sure the trustee has the authority to continue to hold that asset even if it is not productive or profitable. Just because the donor chose to retain those assets, without specific language in the trust document, that investment authority does not transfer to the trustee. Also, owning a significant concentration of one stock is probably not a prudent investment unless the trust document authorizes the trust to continue to hold it even if it loses value. If the trust holds loans, those should be secured unless the trust specifically authorizes loans to be unsecured – it is prudent however, to secure loans even if they are made to a beneficiary. If, as trustee, you hire investment advisors, make sure that you do due diligence and check the investment advisor’s references and background. Make sure you determine how the investment advisor is compensated and how those fees are charged to the trust.
Accountings and Reportings – A critical element of a successful trustee/beneficiary relationship is open and transparent communication about finances and distributions. Review the trust document to determine what reports are required and who should receive them. Also determine what the procedure is for assenting to the accountings –especially if a beneficiary does not acknowledge or assent to the accounting. It is also advisable to have regular in-person or telephone meetings with the beneficiaries to answer any questions and ascertain their needs.
Compensation – Review the document to determine how your compensation will be established and what expenses are reimbursable. If you are also serving as the trust’s accountant, be clear on whether that is part of your trustee fee, and if not, how compensation would be otherwise billed. Since you, as trustee, are paying yourself as accountant, it is important that there is a clear understanding of when you are acting as trustee (and how you are compensated for that) and when you are acting as accountant (and how you are compensated for that).
Serving as a trustee for your valued client can be an honor and a privilege –but it is important to understand the difference between your role as trusted advisor and your role as trustee and to review the trust document objectively with an eye to the future.
Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.