FAMILY OR PROFESSIONAL? WHY CHOOSING THE RIGHT TRUSTEE IS CRITICAL
BY SIMON REED
If, like many of our clients, you are considering setting up a trust as part of your wealth plan, you will need to decide who to appoint as trustees. On the surface, the decision seems simple: select two or three people who you trust implicitly and ask them to serve as trustees. Perhaps they are family members or perhaps they are close friends or professional acquaintances.
Not so fast.
Choosing trustees is one of the biggest decisions you can make when setting up a trust. It is not simply a matter of finding someone who can make the right decision when the time comes to distribute the assets held in trust. Instead, it is about finding someone who can carry out their fiduciary duties during the lifetime of the trust, maintain an understanding of their responsibilities, and then make critical decisions at the right time. Depending on the nature of the trust, this may or may not be the right role for family members.
WHY YOUR CHOICE OF TRUSTEE IS IMPORTANT
Trustees are critically important. To do the job properly, they need to have a broad set of skills that include being discreet and impartial, as well as knowledge and expertise around trust law and managing the assets held within the structure. They must also understand their responsibilities under the various pieces of legislation for trusts, as well as the legal situations that might arise over the years.
Trustees need all of these capabilities because their job is more than mere rubber stamping. When you set up a trust, ownership of the assets is signed over to the trustee, who then has responsibility for managing the money or assets that it holds. All of which needs to be done in the best interests of the trust’s beneficiary, which is a big responsibility.
One of the first things a trustee needs to do is appoint someone to manage the financial assets in the trust, usually an investment manager. To do this effectively, the trustee needs to have a good grounding in investments and the ability to do thorough due diligence on the manager they select. From this point onward, the trustee must keep accurate records on the trust, ensure that it continues to be managed responsibly and in line with the beneficiary’s best interests, and, when the time comes, the assets are distributed in the right manner. A professional trustee would carry out all these responsibilities with impartiality and work hard to manage any conflicts that arise.
THE UPS AND DOWNS OF APPOINTING FAMILY
It’s true that a family member can be a trustee. There are no restrictions on this under English law and, in many cases, people have had great success by going down this route. It is certainly cheaper than appointing a professional trustee. Plus, there are some genuine benefits: family or friends may have a better understanding of your wishes and intentions, and this will guide how they manage the trust.
However, appointing family members can also be fraught with risks and potential conflicts. For example, some family members might not want to be involved in managing the trust, so appointing them as trustees could prove detrimental. Another problem is that they may not have the time to manage the trust, they may encounter health problems that prevent them from carrying out their duties, or they may even die.
Then there are occasions when family members might overstep boundaries. Should siblings or parents be making decisions when their personal emotions might cloud their judgement? At best, making a biased decision can cause a family dispute. At worst, it could end up in court. One famous example is the case of Klug vs Klug back in 1918, when a court overturned the decision made by a trustee who refused to pay out trust funds to the beneficiary – her daughter – because she married without her mother’s consent. This highlights the potential problems that can arise when family members are trustees: even if you are rightfully angry with someone, you still need to act in their best interests when it comes to managing the trust.
THINK ABOUT THE BIGGER PICTURE
Ultimately, the decision of who should be a trustee needs to consider the type of trust being used and what it intends to achieve. Sometimes family and friends are the best people for the job when the circumstances are right. However, in situations when considerable assets are being held in trust with a view to passing to the next generation, there is good reason to hire a professional.
It may cost more to appoint professional trustees, but this is paid back through their expertise, their deep knowledge of trust law, their ability to appoint and work with investment managers, and their impartial approach to making decisions for the beneficiary.
Selecting the right trustee takes time and requires its own due diligence process, but there is no better way to ensure your peace of mind.