20 October 2008

Family office news: Choosing a Fiduciary - Think Many More Times Than Twice


Each time a family trust is formed, family members make crucial decisions that may reverberate for generations. Yet many families decide in haste when naming trustees and creating these structures. It’s easy to simply name a trusted family member, friend or colleague and assume
the rest will work itself out. But circumstances change – and so do people.

Here are a few considerations when setting up a family trust:

Flexibility of the plan. Can it adjust to changing situations such as health issues of trustees or beneficiaries, marriages, divorces, economic fluctuations, succession issues? Does it include a pool of potential replacement trustees?

Choice of trustees. Are trustees being chosen for the right reasons? Remember, this is a long and potentially demanding commitment that may need to withstand myriad pressures. Often neglected in this choice are important subjective issues. Does the trustee truly care about the
beneficiaries? Can he be impartial and fair in dealing with them? Does he understand the family dynamics and buy into the philosophy of the grantor? Does he have the right people skills? Does he have the patience – and the time – to devote to the emotional issues that may arise
from administering the trust?

Different beneficiaries demand different skills from a trustee. Sometimes this raises uncomfortable issues, such as substance abuse or even general irresponsibility among beneficiaries. Can the trustee say no to inappropriate demands? Do beneficiaries have medical or emotional
issues that will need attention and is the trustee willing to take these into consideration?

Are there any potential conflicts of interest? Does the trustee have any personal interest in assets in which the trust also has an interest?

Other issues to consider might be:

  • Age of the trustee. Is the beneficiary likely to quickly outlive the trustee? Or is the trustee significantly younger than the beneficiary, creating generational tensions?
  • Relationships. Is sibling rivalry an issue? Will a second marriage affect attitudes toward stepchildren?
  • Personal problems. These can be a distraction and financial problems can create the temptation to abuse access to trust funds.
  • Inaccessibility. Does the trustee need to travel or does he hold a job that makes him inaccessible during working hours? Is geographic location an issue?
  • Experience. Has the person acted as a trustee before? Does he have the experience to handle investments, record-keeping and accounting? Does he know where to go to seek expertise he may not have?

In making all these decisions, it’s especially important to consider how relationships – and people – may change during the life of the trust. A genial older family member may develop dementia or some other disability associated with old age. A docile child may become a rebellious adolescent. Marriage, childbearing, career success or failure and divorce may change relationships and create new tensions.

Trustees need to be flexible, well informed, honest and impartial. They need to understand the family’s peculiar dynamics. Finally, trustees also need to be compensated adequately for their efforts. It’s a significant job and no matter how close the relationship, it’s unfair to ask someone to do it for free.

We help families set up trusts for a range of purposes, and guide our clients through the process of choosing fiduciaries and finding the most appropriate match between a family’s needs and the person chosen for such crucial responsibilities.