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Choosing a Trustee and Investment Manager for Your Planned Gift


									               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

  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.
  26 Mass (9 Pick.)446 (1930)
  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.
  In 1998 articles appeared in Forbes and Town and Country., among others.
  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.

  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.
  The Wealth Replacement Trust™
  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)
  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
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
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
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
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,

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

     See supra, Dobis, fn 8.
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
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
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.
Query: What reputation has the trustee invested in and with whom?
  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
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
Commitment - Profitability
HELP! Standalone profitability or connected with an organization that derives it’s profitably
importantly from the trust business.

 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
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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