In designing estate plans, I am often instructed by the client to name friends and family members as successor trustees under the trusts employed to carry out the plan objectives. This is no problem when the trust terminates on death of the settlor. But if there is a surviving settlor/spouse, or when the trust is to serve the needs of several generations after death of the settlor, the job of the successor becomes too complicated for the untrained, and the successor trustees just a few decades down the road are not even born yet! How do you gain assurance that the job will be carried off with competence and fidelity? Can't do it.

With a quick rundown on the complexities of the trustee functions and the personal liability assumed, I usually respond by explaining how corporate trustees don't die, become senile, lose interest in the job, move away in the dead of night, steal, or mismanage the trust estate. Having somewhere north of $2 billion in estates with various banks and trust companies either actively managing client assets or waiting in the wings for their turn, I speak from more than a little experience.

Then the stories start. "Dad used a bank trustee and his second wife had it invading principal for her fancy lifestyle so much that nothing was left for the family,"... "Aunt Tillie used a local bank as trustee, and they lost her money in bad investments," and so forth. Except for one such story -- about Dad and his second wife -- most of these stories started in some distant part of the family and were passed from relative to relative, becoming more horrendous with each retelling until truth and fiction became indistinguishable. (In that one case, Dad was on the east coast with the second wife, while the kids were on the west coast in college, and it happened 60 years ago, so who knows what really happened?)

Many of these stories are born of the usual conspiracy theory paranoia. Others reflect a desire to "keep it in the family" in order to cloak in privacy some skullduggery or problems that have gone on for years, or to avoid displeasing someone. With respect to using corporate trustees for life insurance trusts (the one sure way to avoid an IRS claim that the settlor-insured controls the trust operations through a subordinate person-trustee), the resistance is usually to paying a trustee fee. The fee is usually about $525, compared to a life insurance premium of $10,000 or more. Go figure!

Frankly, I have seen a few corporate trustee mistakes over the years, but nothing that couldn't be remedied once it was realized. Never have I seen fraud of any kind. At bottom, though, if fraud or mismanagement takes place, the corporate trustee can not only be sued, it has the money to pay the judgment! That can't be said in the usual case where the theft or screw-up is at the hands of your brother-in-law.

Forbes published an article entitled Don't Count Your Chickens in its March 6, 2000 issue on this topic. In its first illustration, the name of a corporate trustee Ð Bankers Trust -- jumps off the page as the author, Brigid McMenamin, recites a $7 million loss in a $9 million trust estate due to investments in real estate. On closer reading, however, the decedent settlor's son was the one who managed those holdings, so it is likely that the settlor wanted it that way. The family is now engaged in a lawsuit with finger-pointing in all directions. It is true that sometimes corporate trustees take on trusts under which too much financial control is delegated to family members (individually or as a committee), thereby abdicating to some extent its fiduciary duty to all beneficiaries, present and future. But that starts with the judgment call made by the settlor: Left to its own devices, the corporate trustee would have taken a more prudent tack.

In its second illustration, a New England widow was done in by her stepson, a trustee characterized as "a would-be Donald Trump with a taste for cocaine." He sold her 13-acre estate and put her in a condo. After spending all the money, he mortgaged the condo, as well. In due course, foreclosure forced her to move in with relatives. When asked why she failed to take any protective action, she said, "No one wants to put family members in a bad light." That reasoning permits more fiduciary abuse among family members than you might think.

The third illustration points up the limited amount of time family members may have for the task. There, an executor took four years to sell the decedent's medical practice. Well, duh! It doesn't take a rocket scientist to figure out that when a patient finds the doctor is dead and no replacement is in sight, that patient will find another doctor. In that case, the statute of limitations barred recovery by the time the estate was finally settled.

In another illustration of the poor judgment exercised by amateurs, the decedent's son was named as executor. He clung to a $10 million parcel of raw land in a hot market, missed the peak and hung onto it for years thereafter When his sister sued, the jury found that he had deprived the income beneficiaries of millions in potential distributions by missing the market, and that he had overcompensated himself by $2.4 million. The judge took the verdict away from the jury; let the son return $2.8 million to the estate and continue as executor. The court then approved the payment of $1.5 million in fees to the son's attorneys.

I write all this to say, covering up family stuff may be a smart move on the right facts, but unless that is your motivation, think twice before naming a friend or relative as successor trustee. Even if they are smart and honest, they are not trained for the task, they may not have the time to do the job well, and if they screw up, you are unlikely to recover the losses.

Return to previous page