Choosing a trustee

Three questions

Before anyone argues about fees or letterhead, it is worth writing down who will decide the investments, who will decide the distributions, and who can remove the trustee if it goes badly, because almost everything else on this page is in service of those three.

Somerell administers private trust companies, and we do not act as trustee. If the trustee is going to be your own company, we administer that company and its board runs it. We will not take your lawyer's chair, your accountant's, or your investment adviser's.

A way to sort it

Three practical questions come up in almost every meeting. Will the family keep a board? Has a bank or a custodian asked for a licensed trustee? Does the family want to keep its advisers? The paths end with a person, a regulated trust company that serves the public (full or directed), or a private trust company. The diagram stops there. Ask your lawyer which path fits. This site will not pick it.

Directed trusts

In an ordinary trust the trustee picks the investments, decides the distributions, and is responsible for both. A directed trust splits that. The five states compared in the next guide all provide for it. The starting sections are W.S. 4-10-718, NRS 163.553 through 163.5559, SDCL chapter 55-1B, and 12 Del. C. § 3313. Alaska's are in its trust code. Confirm that section with counsel. The document names someone to direct the investments, and it can name someone else to direct distributions. The trustee carries the directions out, keeps the books, and deals with the custodian.

The reason to study it is liability, not fashion. A trustee who follows a direction the statute covers is generally not liable for the result. The person who gave the direction is. That is how families keep an investment adviser and still have a corporate trustee. It is also the usual pairing with a private trust company: your private trust company is the trustee, and the advisers the family already has direct what the instrument lets them direct.

A direction the document does not authorize is a different case, and so is a trustee that follows a direction it knows is outside the grant. The acceptance letter should say which decisions are taken on direction and which ones are not taken at all. If that will not go in writing, that is a fact to take to counsel before you sign. Have counsel compare the clause to the statute. The states are not identical.

Who signs the check

Some payments are fixed. All the income, or a set amount, on a date. The trustee's job there is to pay the right person the right amount on time. Discretion is harder. "Support" and "full discretion" are not the same power, and the person holding it has to be able to say why this beneficiary was paid and that one was not.

If the settlor keeps the power, a lot of the tax and creditor result people think they gave away is still sitting with them. If a beneficiary who is also trustee can pay himself, that is a smaller version of the same problem, which is why that power is often limited or given to someone independent. A distribution committee, or an adviser who is not a beneficiary, is how drafters do that. Whether to do it is counsel's question.

The paperwork is where files fall apart. Write down the request. Write down the decision, and name the power being used. Pay it from an account in the trustee's name. If the family practice is that someone asks and someone pays, that is a habit, not an exercise of a fiduciary power.

Giving up control

The protection people are usually talking about, from estate tax and from a settlor's later creditors, exists only to the extent the settlor no longer owns the property. Owning it, for those purposes, includes the power to undo the trust, the right to the income, and the power to decide who gets paid. A trust the settlor can unwind is still the settlor's. This is not a promise about any family's tax or creditors. It is the shape of the question. Ask counsel about the transfer you are actually making.

Some of these states let a person create a trust for himself and still claim a measure of creditor protection. The sections are W.S. 4-10-510 through 4-10-523, NRS chapter 166, SDCL chapter 55-16, 12 Del. C. §§ 3570 through 3576, and AS 34.40.110. Wyoming's listed exceptions are in W.S. 4-10-520. The others have their own. None of them fixes the tax result of a power that was kept. Don't pick a state because someone said its name means the assets are safe.

Once powers have been given away, the family still needs a way to fix things. Trustees disappoint. A trust written this year may need another set of administrative terms in twenty years. The way drafters keep that flexibility, without handing the powers back to the settlor, is to give them to someone who is not the settlor. A trust protector can be given authority to remove and replace the trustee, to move the trust, to change administrative terms, and, if the document says so, to change beneficiaries or pour the assets into a new trust. The protector acts. The settlor does not.

The protector has to be someone who will actually act, and who is not the settlor under another title. That choice matters as much as the choice of trustee. Administering your company does not make us the trustee, and it does not make us the protector. Name someone else.

Decanting

Decanting lets a trustee move assets from one trust into another with different administrative terms. People use it to add a director, change a successor, split a pot trust, or change governing law. The sections are W.S. 4-10-816(a)(xxviii) (in the Wyoming statute since 2013), NRS 163.556, SDCL 55-2-15, 12 Del. C. § 3528, and AS 13.36.157 through 13.36.159. They are not identical. Some let the trustee touch beneficial interests in limited ways. Others stay on administration. Notice is part of several of them. South Dakota wants notice when the exercise is a modification of the first trust (SDCL 55-2-15). Alaska's exercise is ordinarily effective 30 days after notice (AS 13.36.159).

It is a repair tool, not a way for the settlor to keep control, and it is not available for every trust. A trustee who is also a beneficiary may not be able to use it. Notice is commonly required. Have counsel compare the two documents to the statute before anyone relies on it.

Getting out

A trustee can resign. The document usually wants that in writing, plus the property and the records delivered to the next trustee. Quitting does not erase liability for the years served. Removal should be written down. If a protector or a group of beneficiaries can remove the trustee without having to prove misconduct, the family is not stuck. If nobody has that power, the path is court, and the question will be how the trustee behaved, not whether someone changed their mind.

Name the successor while everyone can still think. A list that runs from a person, to a corporate trustee that will actually serve, to a way of appointing someone else, survives the first two names disappearing. A private trust company is one way families make succession a change of directors instead of a change of trustee. The company stays. The board changes. Put the removal power in the document at the start. Adding it later is the hard version. Ask counsel to draft it. Don't leave it as a hope.

Fees

A trustee is paid unless the document says otherwise. Institutional fees are often a percentage of assets, with a minimum, and with extra charges for tax work, real estate, or a private business. A directed trustee should cost less than a trustee who also invests the portfolio. If the quote does not reflect that, ask why. A family member often serves for little or nothing, which works until the work is real. This site does not quote Somerell's fee. That is a conversation, not a page.

The conflicts are ordinary. Does an affiliate invest the money for a second fee? Are you being put into their funds? Will they hold the ranch, the house, or the concentrated stock their platform would rather sell? Will they take direction from an adviser they don't employ? Who do you call when the officer leaves? If you don't like the answers, that is information for the decision you and your lawyer make.

Questions to ask a trust company

• Who owns the firm, and who succeeds the people in the room?
• Who supervises it, and how often is it examined?
• Will it serve as a full trustee, a directed trustee, or only one of those?
• What will it do with unusual assets?
• What is the fee, and what is extra?
• Which affiliated products are you expected to use?
• How often do officers turn over?
• What do you get back, on what timetable, if you leave?

Questions to ask a PTC administrator

• Who signs? If the answer is the administrator, that is the wrong shape.
• Where is the work done?
• What will they not do? Trustee, protector, director, and investment decisions should be on that list if you are talking to Somerell.
• Who owns the records, and in what form can you take them if you leave?
• How do you leave, and what does the company receive on the way out?