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Advising Your Clients on Choosing and Evaluating Trustees— The Odysseus Question1 by Elizabeth L. Mathieu, Esq. Printed in Estate Planning Magazine When Odysseus went off to fight the Trojan War, he left behind Penelope, his wife; Telemachus, his minor son; and his most trusted friend, Mentor, who was responsible for caring for his estate, the education of his son; and protecting his wife. He returned after a combined 20 years of war adventures that can best be described as an Iliad, and a journey that can only be described as an odyssey. At that moment, Odysseus found his arrangements had gone awry. During his long absence, Mentor had died, leaving Telemachus somewhat deficient in the manly skills needed to defend his future inheritance. Some 108 suitors had occupied Odysseus’ house where they were dissipating his wealth and besieging his wife. In the absence of the master, a strong heir, or a surviving personal trustee, the vagaries of human character took their course. Although Odysseus’ swineherd, Eumaeus, had taken good care of his responsibilities, Melantheus, the goatherd, had not. We could attribute Odysseus’ difficulties to the problems inherent in having selected a personal, not a corporate, trustee, who did not survive the unexpectedly long absence or change in circumstance during that absence. The role of trustee and the law of trusts have evolved over the millennia to respond to the changing needs of individuals to protect their property and their family. The concept of a trust relationship is said to have begun as a response to the exigencies of the crusade situation – the crusader needed someone at home to protect property and family. This was essentially a caretaker function for an arguably specific time frame (e.g. until the crusader returned). The trustee relationship in American law was still primarily viewed as a limited-term, caretaker function until sometime during the 19th century. Only when the case of Harvard College vs. Amory,2 was decided by the Massachusetts Supreme Court , were trustees legally freed to invest for the long term – at least in that jurisdiction at that time. Thus was it first officially recognized that trusts were not only appropriate for meeting short-term objectives of settlors.3 Today, the dynasty trust appears to have become as important as the caretaker, short-term trust - in the press4, trust, and estate professional publications5, and in the business focus of the top tier of the corporate trust industry. Also, states are increasingly addressing the need to 1 Profession Robert J. White, Professor of Classical Languages and Literature, Hunter College assisted the author greatly with the understanding of the lessons of this myth as applied to the subject of the article. 2 26 Mass (9 Pick.)446 (1930) 3 Friedman, A History of American Law (2d ed. 1995) p 252. Indeed, during the 19 th century, New York, and other states worked legislatively to restrict rather than expand the rule against perpetuities first developed in English common law during the 1800s. 4 In 1998 articles appeared in Forbes and Town and Country., among others. 5 Numerous articles have appeared in the legal and planning press in such publications as Trusts and Estates magazine, Tax Advisor, Estate Planning, Financial Planning, and many state law journals. In early 1999 alone, Richard Nenno addressed these types at the 1999 Hekerling Institute in Miami in January; the DC Bar is hosting a lunch in March at which JP Morgan will discuss these trusts. abolish the rule against perpetuities in recognition of individual focus on multigenerational wealth preservation as the prime need for trusts6. One lawyer has even trademarked the name of a type of dynasty trust.7 In our increasingly faster paced and complex world, the concepts governing the trustee’s relationship with, and duties toward, the settlor, the trust property, beneficiaries, advisors and creditors, continue to evolve with respect to theses trusts. There is no simple solution in sight8. Therefore, the criteria applied in the past to evaluate the effectiveness of trustees may be necessary but insufficient to address all the requirements of trusts today. There is an increasing chance that even before the original beneficiaries have passed on, the laws governing the trust’s operation, the economics of the trust business, and the needs of the beneficiaries will change significantly. Therefore, the most important deciding factor for retaining a trustee could be the processes underpinning the professional trustee’s governance of the trust which not only allow, but also encourage change over time. In light of these probabilities, a specific relationship of trust between a settlor or beneficiary and individuals in the corporate trustee, and a client’s satisfaction with the corporate trustee’s track record in terms of service, administration and investment management at the time the trust is created, should not be the only criteria for choosing a trustee. Jay Hughes speaks about the trustee-beneficiary relationship as sometimes akin to an arranged marriage over which the beneficiary has had no influence in the arranging, and further has no information about how to evaluate and participate in that relationship over the term of the trust9. This certainly can be true in cases in which grantors establish estate tax-motivated trusts for heirs without consulting them or involving them in the process. This observation could also be true if an attorney suggests a trustee or list of trustees to a client-settlor without emphasizing to the client first, the need to focus on determining how the trustee might provide service in the future, and second, the probability that as the world changes so could the relevant criteria for retaining trustees over time. The purpose of this article is to assist lawyers who advise wealthy individuals and families seeking a trustee to administer some or all aspects of a multigenerational wealth preservation plan. These families generally require a trustee to be objective in its advice, exhibit a multiplicity of skills, be dedicated to beneficiary education, have experience in acting as a member of a client’s advisory team, and finally, be focused on trust relationships as a long- term matter. 6 Delaware, North Dakota, Wisconsin, Illinois, Alaska, and Idaho already have effectively abolished the rule. New York and Florida legislators, among other states, are considering abolishing the rule. 7 The Wealth Replacement Trust™ 8 For an interesting discussion of the evolution of views about fiduciary relationships, see Cooter, Robert and Freedman, Bradley, The Fiduciary Relationships – Its Economic Characteristics and Legal Consequences, 66 N.Y.U. L. Rev. 1045 91991). For a comprehensive, if somewhat controversial, view of changes in the trust business, see Dobis, Joel C., Changes in the Role and Form of Trusts at the Millennium, 62 Alb. L. Rev. 543 (1998) 9 James E. Hughes, Jr., Esq., “The Trustee as Mentor,” The Chase Journal, Insights on Trusts and Estate Planning, Vol. II, Issue 2, Spring 1998. Choosing a Trustee— If you can predict the future, you will have understood the past The trust business used to be quite straightforward – until approximately the mid-1980s. The grantor would choose a trustee from among the following five possibilities: the grantor; a member of the family of the grantor and/or beneficiaries; a friend; a legal or accounting professional; or a trust company or bank trust department. Choice tended to be based on the settlor’s trust of a particular individual and, if a professional trustee were being considered, the client would evaluate the administrative and investment track record together with the behaviors being exhibited currently with respect to other similar trusts. Today, while the questions about track record and current behaviors are still important, they may not be asked in such a way to ensure that all of the pertinent topics are covered. The services offered today might not be suitable for the beneficiaries of tomorrow. Therefore, in this fast changing world, perhaps a more effective focus of a track record and behaviors discussion should be on how flexible and responsive a trustee is in meeting unusual needs and developing new services over time rather than on the specific services offered at the moment. And, if indeed, understanding how the fiduciary will perform in the future is more important than how it performed in the past, a review of the mechanisms a trustee has in place for insuring that it can respond to future beneficiaries needs is key to a complete analysis. Those mechanisms have both “hard” and “soft” considerations. The “hard” considerations include 1) in what states a trustee can operate and offer the protection of their laws to settlors and beneficiaries and 2) what reputation the trustee has invested in. The soft considerations include the commitment of the trustee to the business as evidenced by growth, staffing (including the skills invested in and the means for encouraging individual creativity among the staff), and profitability. The “soft” considerations can also include demonstrated “corporate” culture and key shared values among all members of the trustee organization. Choosing and monitoring a trustee is a more daunting task than it was in the past. However, if the advisor takes the time to systematically analyze the professional trustee’s track record in terms of flexibility and creativity and its mechanisms for ensuring a future, he/she will have a greater chance of advising his or her clients well and of developing a successful long term strategic partnership with trustees appropriate for the clients over the long life of today’s trusts. Below are a number of areas to be explored to insure that the client understands the past (track record), the present (current behavior) and the future (mechanisms for stability, opportunity and change) with the professional trustee. The following is not a complete list of questions but rather some new queries, which might not have been asked in the past. For a complete checklist of questions, there are a number of books and articles available10. Track-Record - Response to Change Query: How has the trustee responded in the past to changing needs of clients with profiles similar to that of your client? Was that response proactive or reactive? Why? In some cases, change in clients needs can be caused by outside forces such as the growth of Internet sophistication among clients which takes time to understand and respond to. For example, while clients will not “buy” trusts via the Internet, they increasingly wish to obtain their account and other information electronically. In such a case, a reactive response to these changes would be appropriate. In other cases, such as the noticeable trend that as the trust client population is aging in some parts of the country, they could use a bill paying service, establishing such a service proactively would be appropriate. In both cases, the trustee would be responding to recognized changes in the world around it. In the one case, a reactive response was appropriate and in another a proactive response provides evidence that a trustee is willing to invest in services for the future of its clients. Query: What factors did the trustee take into consideration when it determined if it should change investment managers who did not perform satisfactorily against specific style benchmarks? Changing investment managers for dips in short term performance could be a disservice to the beneficiaries if long term performance was satisfactory in terms of the reward/risk tradeoffs in the long-term and appropriate for the objectives of a trust. The more sophisticated corporate trustees are increasingly using complicated analyses of investment performance and style to evaluate the effectiveness of trust investment policy and managers in the short, medium and long term and sharing that analysis with settlors, beneficiaries and their advisors. To do so, however, the trustee must have access to professionals who can integrate an understanding of trust administration with an understanding of investment management. The best laid estate plans can be devastated by unresponsive investment management and the best investment performance in an asset class or style category can be inappropriate for the trust if the trust’s objectives and beneficiaries risk tolerances are not the leading directive of a trust’s investment policy. Current Behaviors – Service and Flexibility Query: How objective is the trustee in providing advice? A trustee must be independent of the interests of others to ensure that it fulfills its duty of loyalty and care to beneficiaries. While some authors argue that loyalty, and thus, 10 independence, is a rather old fashioned concept11, it is receiving intense attention as still viable in areas of charitable trusts and tax-exempt organizations.12 It also seems to be important to the crafters of the Restatement Second of the Law of Trusts,13 important to the state and federal regulators of trust companies and very important to clients as evidenced by the findings of a year-long study by the VIP Forum14 and by this author’s own experience. An increasing number of investment managers, insurance companies, and mutual fund companies have either established fiduciary subsidiaries or have applied for the national thrift charter15. It is clear that there could be limits on the objectivity of trustees owned by such entities. However, frank discussion of the limits of objectivity, combined with hard evidence of both offering administrative trustee services and multimanager oversight, and cannibalizing products in the interests of the clients - demonstrates the seriousness with which a fiduciary views the duty of loyalty and care to beneficiaries. If the client is attracted by the products offered by the trustees, the addition of the trustee as overseer of all providers of those services to clients should provide comfort that the fiduciary will act in the best interest of the client and family. Query: What is the range of skills available in the professional trustee’s organization? After determining that the number of relationships per senior and junior trust officer is low enough to ensure that your client will receive the care and attention he or she expects, and the officers’ compensation system rewards the types of behaviors which your client would appreciate, the next question is are there are skills in the organization which the administrator can access to ensure that all of your client’s and family’s needs are met? For example, if your client is an entrepreneur, are there planning professionals available with experience in succession planning? If your client views philanthropy as a way in which to teach heirs that aspect of the responsibility of wealth, are there professionals in the organization with both a personal and professional commitment to education and guidance of heirs with respect to the roles and responsibilities of family members participating in implementing a family’s multigenerational wealth preservation and charitable goals? If your client has a number of advisors he or she uses, are there skills in the professional trustee’s organization to act effectively as a member of a client’s advisory team? Query: How are these skills leveraged for the benefit of clients? The complex nature of multigenerational relationships requires a professional trustee serving such relationships to assemble teams of professionals in its organization to respond to the wide-ranging needs of individual family members. If the trustee is not also organized to insure that the senior professionals focus on complicated matters and junior officers focus on more 11 See supra, Dobis, fn 8. 12 13 14 15 straightforward tasks such trust distributions, the trustee runs the risk that the senior professionals can not devote sufficient time to the proactive meeting of client needs. Also, if the trustee does not invest in technology to ensure that its knowledge management system16 captures all the relevant client information to support both the transactional requirements of a relationship and the advisory requirements of individual family members, it may run the risk of being unaware of critical client needs over time. Query: What is the number of days on average needed to review trust and other planning documents? Does the trustee allow clear exit clauses in trust documents? Understanding the account acceptance and opening processes at a professional trustee will provide guidance to how responsive and flexible a trustee is in providing services to clients. Clients, by definition have different needs, assets, and time horizons. A trustee’s ability to respond efficiently to different client needs when setting forth the guidelines under which it is willing to operate with respect to a relationship and its willingness to work under a document which makes it easy for a family to change trustee should enhance your client’s ability to evaluate the commitment of the trustee to providing services which clients want. Mechanisms for ensuring the Future States Laws Query: To which states laws can a trustee provide a client access? State laws govern trusts and indeed all of the various forms of planning vehicles available to clients. States laws are not uniform. Some are more favorable than others in terms of permitting goals of these vehicles to change over time, tax-management, and trustee discretion. Currently, there are three states with “designer” trust and tax laws – Delaware, South Dakota and Alaska. Many other states are examining their own laws to determine how and if they should respond to these jurisdictions’ efforts to be the leading estate planning states in the country. Trustees with state-chartered trust companies in these states evidence a willingness to provide clients access to the most flexible laws available. However, accepting the jurisdiction of a particular state over the operation of a trust or other planning vehicle permits the client to enjoy the protection of the state from malfeasance in the administration of the vehicle and participation in future changes in the state’s laws. Therefore, the relative depth of juridical and legislative expertise in and experience in trust law of each state under consideration and each state’s demonstrated commitment over time to fashioning attractive laws is an important evaluation. The analysis should focus on how comfortable the client and family can be that the jurisdiction has the commitment to provide an environment which could be responsive to changing beneficiary needs over time. Reputation Query: What reputation has the trustee invested in and with whom? 16 For a view of how “knowledge management" systems can impact the effectiveness of professional services organizations such as corporate trustees, see _____________. Trustees can invest in their reputation with clients and/or advisors. Reputations are by definition fragile. The threat of loss of reputation motives all service providers to constantly and consistently build reputation. Arguably, the reputation the trustee seeks to have with professional advisors, and particularly lawyers, and the methods used to gain that reputation, such as serving lawyer’s clients well and contributing and being part of professional forums is key to understanding the long-term goals of the trustee. Therefore, if a trustee has a reputation with leading trust and estate lawyers for solid client service, understanding of sophisticated planning techniques and building a business on secure, profitable grounds, that trustee has made a long term commitment to the trust business. Commitment – Attitudes about Growth Query: What is the history of growth and change in the business organization over time? How has the trustee responded to this growth (e.g. more professionals, better systems, other)? Has the response usually been anticipatory of the growth or only after the growth has occurred? Some trustees function most effecitvely for clients if they remain small and focused. Certain family offices have made the choice to remain small and outsource services to ensure that the core competancies of the staff remain concentrated on the identified needs of the target clients. Others function well because chaos created by rapid growth is anticipated and controlled. In both cases, a discussion with the trustee about its attitude toward growth and focus would contribute to understanding how growth will be handled in the future and your clients served. Commitment - Attitudes about People Query: As the people in the organization will be delivering what the client expects from the trustee, how is the trustee rewarding behaviors which are attractive to the client and investing in its professional’s development of new skills over time? While good professionals are generally internally motivated to provide good work to clients, the external motivations provided by the trustee are also key to understanding whether the professionals will remain at the trustee organization or not. 17 Professionals at corporate trustee organizations are senior trust officers and planners both of which groups wish to provide good ideas and efficient service to the clients and their advisors. If the trustee is not rewarding these professionals for good service and creative solutions to client problems and also is not offering them ways in which to continue their professional development , the trustee runs the risk of demotivating its staff and suffering a level of turnover which is not conducive to long term multigenerational relationships with clients and families. Commitment - Profitability HELP! Standalone profitability or connected with an organization that derives it’s profitably importantly from the trust business. 17 For a discussion of the unique challenges presented by managing professionals, see Lorsch, Jay W. and Mathias, Peter F.When Professionals Have to Manage, Harv. Bus. Rev. 1987 Conclusion Choosing a trustee is an increasingly complicated matter because of the fragmentation of the trust industry, the growing sophistication of clients, and, at the same time, the shrinking number of advisory professionals on which a client and his or her family may rely. This matter is even more complicated by the human side of the trustee-beneficiary relationship, which has only been briefly touched upon here. However, going forward over time, the belief that the trustee is organized to foster trust between all professional staff of a trustee and each succeeding generation of beneficiaries could be the most crucial determinant in choosing a trustee who can faithfully serve the family over multiple generations and relieve a settlor of the “Odysseus Question”.
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