I very recently learned that a good friend of mine has named me trustee.
Now. Should I be flattered or frightened? The honest answer is — both.
The next few decades will see global intergenerational wealth transfers on an unprecedented and almost unimaginable scale.
Some estimates in this regard range from $15 trillion to more than $40 trillion.
Whatever the actual amount turns out to be, it will be mind boggling.
Unsurprisingly, sophisticated estate planning strategies and structures have been developed to address this challenge, many of which involve individuals or institutions acting in a fiduciary capacity; for example as trustee of personal trusts or executor or administrator of personal estates.
A trust is a legal arrangement or relationship in which one party (the trustor or grantor) gives another party (the trustee) the title and right to hold and manage property for the benefit of one or more third parties (the beneficiary or beneficiaries).
Trusts can be revocable (meaning that the grantor can change or terminate them at any time) or irrevocable (the grantor has no power to change or terminate).
Trusts generally are funded either during life (inter vivos) or at death (testamentary). Regardless of form or funding, the effectiveness of the trust structure depends significantly on the actions and judgment of the individual or institution acting as trustee.
Trustees are expected (trusted) to make intelligent, appropriate decisions that effectively implement the intended wealth transfer plan and further the interests of both the giving and the receiving generations, while often dealing with facts and circumstances unknown or even unforeseeable at the time of their appointment.
In recognition of that trust, they are often given the extraordinary power — and the concomitantly awesome responsibility — of exercising almost unfettered discretion when making those decisions.
With that power comes considerable potential risk — both personally and financially.
In fact, it's an honor to be named a trustee.
The appointment signifies that someone has such confidence in you, your judgement and your character that they can "sleep well at night" knowing that when called upon you will do the right thing with respect to the people and things they hold most precious.
But what exactly are they expecting of you, and what are the potential risks to you in failing to meet those expectations?
Because of the dramatic degree of control they possess over assets intended to be use for the benefit of others, trustees and other fiduciaries are held to the highest standard under law for the proper performance of their duties, which fall generally into the categories of:
The duty of "prudence" requires that the trustee deal with the trust property as a person of reasonable prudence would deal with their own property, taking into account risk and pursuing the reasonable generation of income and the preservation of capital.
In most instances, the trustee must also ensure that the assets are properly diversified.
The duty of "loyalty" requires the trustee to put the interests of the trust and its beneficiaries above its own, and to avoid both actual and perceived conflicts of interest.
The duty of "impartiality" prohibits the trustee from treating beneficiaries with similar interests differently; in other words, the trustee cannot improperly discriminate among beneficiaries.
The tasks a trustee is responsible for fall roughly into four categories: discretionary decision-making; investing; reporting; and administering.
Discretionary decision-making is the highest-level task.
It's generally the principal reason why wealthy individuals choose the trustees they do — to make discretionary decisions with respect to trust assets (who gets them, when, why and how) as the grantors themselves might do if they were still alive and capable.
It's often both the most difficult and the most impactful aspect of the trustee’s role, and the one for which a potential trustee’s nature, character and relationship with the trust grantor and the grantor’s family immediately and sufficiently qualifies them.
But there is a catch, and it is a very big one — the trustee is personally liable for any breach of fiduciary duty that causes damage to the trust.
This means that a trustee could be required to make the trust whole from the trustee’s own personal funds. (I’ll bet that caught your attention!).
This potential for financial recovery has created a whole new legal specialty, fiduciary litigation, which focuses on institutional and individual fiduciaries alike.
This exposure is not absolute; the test of a trustee’s performance of its duties is actually more one of process than result.
For example, a trustee is not the guarantor of an investment’s performance.
If the trustee can show, preferably by contemporaneous documentary evidence, that its decision-making process was prudent, then the trustee should not be held to be in breach of its duty of prudent investing even if the investment did not perform as anticipated.
However, if the trustee does not have sufficient evidence that it followed a prudent path (or even remember what it had done long ago), the absence of a reasonable explanation can be used to create the inference (inevitably aided by 20/20 hindsight) that the decision was imprudent, and the trustee could be held liable to make restitution to the trust.
Fortunately, resources exist to assist the individual trustee in navigating the world of fiduciary responsibility successfully.
More information, including select case studies, can be found here.
The world needs more good fiduciaries.
So, my answer to the title question above is this: assuming you accept the role with eyes wide open, with a clear understanding of what is expected of you, you likely will do your friend proud.
© Daniel M. FitzPatrick 2021
Daniel M. FitzPatrick is an attorney and long-time wealth management professional who led global personal trust and estate businesses for industry leaders including JP Morgan, Goldman Sachs and Citigroup. He currently serves as President of Northway Wealth Advisors, LLC, an independent boutique providing objective, expert fiduciary advice and assistance to wealthy individuals, families and their related charitable entities. Dan also serves as a mediator and expert witness in support of fiduciary-related dispute resolution. For more information and links to other commentaries, see: danielmfitzpatrick.com.
© Daniel M. FitzPatrick 2021