So, Why a Trustee?


By: Shawn O’Connor

    “What do I need a professional trustee for?”  “Yeah, I have a trust, but I can manage the business, after all I have worked in it for years. I even have a license.”  “Trustees just sit around, don’t do much, and charge a yearly fee for no good reason I can see.  No bang for my buck there.”   “I have my house in a my trust.  Doesn’t do anything but sit there and I can live in it.”  “Why do I need a trustee for that?”
    “Anyway, I can go out and get a friend, or a business acquaintance to act as trustee for a small fee and I won’t bother him and he won’t bother me.”  “After all, let’s face it a Trustee is just a suit holding down a chair, and who can’t do that.”  “What could possibly go wrong?”

    I’ve heard the above soliloquy a number of times; or ones similar.  It is as though the person is trying to talk me into their position, or themselves out of their’s.  Sometimes, it is hard  to tell.  Most conversations which begin like the above arise out of fear of the unknown or ignorance.  Many of the times self-serving financial justification is the reason to question the need for a competent trustee.  In other words, the grantor or settlor of the trust simply doesn’t want to pay for a professional trustee.  In the above soliloquy, the person begins with a faulty premise.  The premise being that the trust is his, and the property therein belongs to him, when in fact it usually  doesn’t. As the theory goes, there are some trusts, trusts which are very simple in nature, which do no business, which merely hold property which do not need a legitimate professional trustee –  That is if you are Alice . . . .  and live in “Wonderland.”

    Let’s assume for sake of argument, that you hire a trustee, a good cheap trustee.  Your brother-in-law, father-in-law, a good friend.  A trustee who listens good and does whatever you want him or her to do.  And then, for some reason, not your fault, not the trustee’s fault, but for some reason, something you didn’t foresee, something the trustee didn’t foresee, goes wrong and someone comes knocking on the trust’s front door and they aren’t there to help either you or the trust.

    What if it is a lawyer, and the trust is being threatened with a lawsuit for a reason you or the trustee couldn’t even imagine?

    What if the government comes knocking, and wants you, or the trustee to explain why the trust does what it does, or questions the trust’s return, or for whatever reasons the government  may come knocking on your door?

    What if  one of your debtor’s attempt to attach trust assets for your bills or liabilities?

    What if someone tries to set the trust aside as a sham; or pierce it to gain access to the trust assets?

    The list of “what ifs” is never-ending, and that’s why I don’t do “what ifs.”  Anyway, who is going to have the right answers to the questions?  Who is going to know if the right questions are being asked by the inquiring party?  Who is going to have the savvy or intestinal fortitude to withstand a legal attack on the trust?  You?  Your cheap week-kneed trustee?  I don’t think so, in fact I know so. Your cheap trustee will cut and run and explain that had you not used your friendship or your influence over him he never would have agreed to such an insane proposition as to be a trustee.  After all, you promised him nothing bad would or could happen.  So its “arrivederci baby, you handle it, and don’t bother me again.”  Then what?  There aren’t any documents showing you as trustee, and your cheap trustee cut and ran before appointing a new trustee.  Or, the successor trustee is of the same ilk of your first cheap trustee and he doesn’t want anything to do with the trust and its troubles, so its “arrivederci baby” once again.  And, once again you are left holding the bag, but there is a huge problem – the trust has no trustee.  

    And, you’re not a trustee.  You may be a great contractor, financial wizard, or plumber, but the one thing you aren’t is a trustee and you have no idea what to do with the problem you have unexpectedly been left to face.  Fact is, you can’t even qualify or quantify your problem because you don’t understand it.  Now what?  You have no idea what is coming your way, or the trust’s way, or what it is you have to do to either prevent it, or deal with the problem.  “SO, WHY A TRUSTEE?”

    To answer the title question an explanation of what a trustee is, and the duties of a trustee is in order.   By definition a trustee is “A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed for a wide variety of purposes, such as in the case for a charity, a trust fund, and; for trusts such as revocable and irrevocable trusts.  Many times trusts are set up for an individual, called a beneficiary, or a number of beneficiaries.  

    Trustees are trusted to make decisions in the beneficiary's best interests. A trustee is required to uphold a high level of integrity and impartiality in conducting his duties. Typically, a trustee is not permitted to benefit or profit from his position unless the trust document specifically allows for payments to the trustee for providing services. As a rule, a trustee has a fiduciary responsibility to the trust beneficiaries.  In other words, as a trustee you are protecting someone else’s interest in that trust property.  This is no small matter.

    A trustee becomes necessary upon the creation of a trust.  After a trust is created the trustee becomes the single most important person who has involvement with the trust.  The trustee makes virtually all decisions which will affect the trust property, (also known as “trust corpus”).  Since the trustee is only holding the property for the benefit of the beneficiaries, not himself, it is important that the trustee is a person of high integrity, honesty, and trustworthiness.  

    In a perfect world it is presumed by the trust indentures that the trustee will always act in the best interest of the trust and the beneficiaries and defend both to the best of his ability.  However this is not a perfect world and if the trustee is suspected of acting in less than good faith for the trust or beneficiaries, a court of competent jurisdiction can hold the trustee accountable and remove him.  Also, the beneficiaries, while in most situations have no control over the operation or management of the trust can also bring an action in court against the trustee.  One of the more popular forms of control over a trustee’s dealing with the trust is a person called a “protector.”  The protector has one duty and power and that is to remove the trustee if the protector has cause to believe the trustee is acting to the detriment of the trust or beneficiaries.  If the protector makes such a determination a replacement trustee is found either by a Court, or as provided in the trust indentures.

    But back to our question “So, Why a Trustee?  Well, To administer, manage, and protect the trust and its assests, of course!  Administering, managing and protecting a trust can be as complicated or as simple as the activities of the trust warrant or demand.  Where a trust is actively engaged in business, or other activities which need day to day supervision, a trustee will usually hire one or more persons to conduct the regular day to day activities of the trust.  The manager, supervisor, consultant, or by whatever title the person is referred, should have knowledge in the area and business activity in which the trust is working.  Usually, such a person will only have the authority to make decisions defined by the trustee and which govern the day to day functions of the trust.  In cases where the trust, or the trust corpus, or the interests of the beneficiaries could be affected, which would not ordinarily occur in the day-to-day operations, the manager would be required to advise the Trustee of the situation and receive consent to proceed.

    In these cases the Trustee’s duties are to ensure that the manager performs his functions adequately and intervene in the event the manager does not have the authority to make particular decisions, or where the manager seeks out the advice of the Trustee, or where the manager is mismanaging the trust.  To this end, a Trustee should have at least general business experience, In a perfect world it would be nice if a trustee has particularized business experience in the area in which the trust does business, but in many cases that will not happen and that responsibility  will fall to the manager or consultant.  

    Many trustees consist of a board.  This simply means that the trustee, or trustees, are governed by more than one person, and usually this will bring a great deal of diversified business experience to the position of Trustee.  The board of trustees can operate as an entity, or in their personal individual capacities.  The activities, duties, and responsibilities of a “board of trustees” or a single trustee will be found in the trust indentures.  

    Now, imagine the trustee of a trust as the CEO (Chief Executive Officer) of a corporation, who answers to no one, excepting the shareholders.  If and when the essence of the corporation is being threatened it is the CEO who steps up and takes responsibility and ensures the corporation sees its way through the situation.  The CEO makes all the ultimate decisions, hires the people he needs to take care of the situation, or takes care it by and through his own expertise.  The CEO only calls in people to assist him when the matter is beyond his expertise.  And, even in those cases when he calls in assistance, the CEO makes the final call and decision.  In short, the buck stops with the CEO.  The CEO has enough business savvy to foresee a potential problem and deal with it before it becomes one, or lessens its impact when it comes about.  Not all problems or situations can be foreseen.  In that event a CEO should be able to handle an unexpected problem, or knows where and whom to look for assistance in resolving the problem.  Now, substitute the word Trustee for CEO.  It works the same with the trustee of a trust.  Does this sound like something a good friend could do for a trust?  If it is, you found yourself a trustee.  If not, you need to keep looking.

    In today’s world working as a trustee is a special calling and a trustworthy vocation.  Few people understand the nature of trusts, the different varieties, and the various reasons for which they can be created.  The business world, once familiar with trusts, now are shy to deal with them for lack of knowledge and fear because of the general ignorance of trusts and trust law.  As a result, businesses shy away from doing business with a trust.  You can even find it quite difficult to open a simple checking account in the name of a trust as even bank officials have lost much of the understanding of trusts when it comes to the nature of a trust.  A professional trustee can easily work through most of these problems and the associated ignorance, but only if the trustee is knowledgeable enough to understand the questions which will be asked of him, and how to explain the trust for which he is trustee.  

    While a trust is created by contract, make no mistake, it is governed by statutory law in almost all jurisdictions.  Additionally, keep in mind contracts are illegal if entered into for an illegal purpose or against public policy.  It is important that a trustee realizes what jurisdiction he is working in with a particular trust, because the laws affecting trusts are as diverse as the jurisdictions.  Imagine each state as a separate jurisdiction, having its own laws dealing with trusts, because that is how it works, not to mention the federal government’s laws which affect trusts.  This is important because your trustee should fairly know, or have an attorney at his disposal who knows, the laws of the jurisdiction under which the trust operates.  The trustee should at least have enough knowledge of the laws governing trusts so he can ask intelligent questions surrounding its activities, or recognize the need to ask the questions in the first place.

    I have seen many trusts established over the years which failed.  Many have failed simply because the trustee had no idea what it was to be a trustee, and so he did nothing.  A trust cannot operate without a trustee.  In fact, a trustee is so instrumental to a trust, that without one, there is no trust.  A trustee who does nothing is as good as no trustee at all and a trustee who doesn’t know what he is doing and does something anyway, is worse than no trustee at all.  When someone attempts to act as a trustee out of ignorance, that person cannot possibly be acting within the trust laws and the trust indentures.  To act as a trustee requires an understanding of both.  

    When a trustee operates outside the law, knowingly or unknowingly, the grantor and trust beneficiaries are the losers.  

    When a trustee operates outside of the rules, the grantor and beneficiaries are the losers.  

    When a trustee plays “with” the government laws, rules and regulations when administering a trust, instead of “by” the government laws, rules and regulations, the grantor and beneficiaries are the losers.

    When a person doesn’t understand why he is a trustee, everyone is a loser.  Actually, under these circumstances above, not only do the beneficiaries lose out, but the grantor is also a loser.  And, in almost all circumstances above, the trustee can be held to answer for his wrong doing, if any, or his self-imposed ignorance.

    When people who create a trust, for whatever reason, fail to hire a professional competent trustee, that person is the loser and intends on seeing the trust fail, as no other option is available.

    I have witnessed homes lost, businesses ruined, marriages wrecked, lives irreversibly adversely affected all for want of a professional trustee.  As well, I have seen businesses protected, individuals lives saved from ruination, families thrive, and assets protected because of the existence of a bona fide professional trustee.  “So, Why a Trustee?”

    If you have created or invested in a trust, for whatever reason, you have done so because you are looking for, and appreciating one of the ultimate forms of protection of property.  Or, you are looking for a viable unique way of doing business which can involve other people easier than a corporation, or a partnership, or a limited liability company; with less personal exposure to liability, and more privacy.   Without a trustee, a trust cannot do this.

    If you have created a trust you have gone to a lot of time and trouble and expense.  You already have determined that you either wish to engage in a business which will serve you and your family well, or you have decided to protect your property from prying eyes, or unnecessary liability.  Without a trustee, a trust cannot do this.

    Or, you have made some very serious estate planning decisions and are using trusts to achieve that end, minimizing court and government intervention in the case of your demise, and leaving your property to who you want to receive it, after your passing.  Without a trustee, a trust cannot do this.

    You have determined the type of trust you need to address your needs, or even your future needs.   In other words you have put time, blood, sweat, and tears into your decision.  “So, Why a Trustee?”  To protect you, your family, your investments, your property, and your life, that’s why!  Are there better reasons.  Perhaps, but they elude me as of now.      

    Lastly, reality dictates that if you have decided a trust will work in achieving your needs,  you don’t establish one just to jeopardize it from the very beginning for lack of a professional trustee.   You don’t spend the time and money and work it takes to bring one into existence just to jeopardize it from the very beginning for lack of a professional trustee.  The expense for a professional trustee to administer your trust within the law is minimal, compared to the cost of establishing a trust which in the end will not be a trust, for lack of a professional trustee.  Quite simply, if you don’t believe you can afford a professional trustee, you don’t need or want a trust as it will provide you with little or no benefits for which it was designed while at the same time causing you endless hours of grief and strive.

    In the arena of trusts and trustees there is probably more misunderstanding and ignorance  than in any other legal/financial activity. Many believe that a trust is a quick fix for a multitude of problems with assets which protect from those who want to take possession of those assets. After problems arise a person will hurriedly ask a friend or acquaintance to form a trust in order to hide some threatened assets.    In these case two old but true sayings apply – "It is better to be six years early than six minutes too late."Another axiom to be followed is ,"You get what you pay for."

    A properly formed trust represents exhaustive research, preparation, and customization. A cheap trust is an ineffective barrier against creditors, suitors, and the government when it comes to the integrity of the trust.  A favorite term used by the government for a trust that it doesn't like, for whatever reason, is "sham."   But, if the trust is properly set up and administered, the government will end up pounding sand if it makes such an allegation.

“SO, WHY A TRUSTEE?”  After reading the above, that sounds like an academic question, and it should.

    As I said previously, individuals can act as trustees, as well as a group of individuals, as well as an entity.  Whether or not an entity can act as a trustee could be a question of the laws in any given particular jurisdiction, or state.  When a trustee is appointed after creation of a trust it is usual that a successor trustee, or successors, be provided for in the trust document, or shortly after the trusts creation.  This is to safeguard the trust property in case something unexpectedly happens to the trustee.  In the case of a natural individual, this is all too possible.  People, die, they become ill or incapacitated for several reasons; they tend to move, or make career changes or they just simply don’t want to be a trustee any longer.  In the absence of a successor trustee the trust could be left without a trustee and may have to resort to the courts to have one appointed.  This is not the most desirable way to choose a trustee.  Even with successor trustee, if the trustee is a mere natural individual the same troubling factors are present that come with a natural individual.  

    In today's turbulent times when private property is not respected as it once was, protection of one's life's work becomes increasingly important and urgent.  If you are seeking asset protection, whether it is for personal or business reasons, and you believe a trust is a vehicle which could accomplish that end, contact FESS.  You will be glad you did!

Shawn O’Connor
1175 Shaw Avenue, #104
P.M.B. 393
Clovis, CA 93612-3932
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News Flash

Uncertainties of the Income Tax
(Courts At War with Themselves)

by Larry Becraft, Attorney

For several years now, a variety of high public officials have openly declared that the federal income tax laws are incredibly complex and need to be either substantially revised or scrapped.   But after making such statements, these officials invariably fail to identify what  specific parts of  the tax laws suffer from this condition, choosing instead to conceal them. Are the objectionable parts of the federal tax code secretly and quietly discussed behind closed Congressional committee doors? If they are, why doesn't someone inform the American public of these deficiencies so that they may likewise participate in this debate? Is it possible that it is the major and not various minor features of the tax laws which are complex, even uncertain? Is it possible that these major features are so fundamentally flawed that they simply cannot be repaired? If so, what is the legal consequence of this complexity?

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