Tales of the two-headed Trustee: How Co-Trustees can create a horror show for Trust administration.

Posted by Keith A. Davidson on October 31, 2011

Just in time for Halloween, the creation of the two-headed Trustee.  They say two heads are better than one.  So why not have two Trustees manage your Trust estate, or better yet a two-headed Trustee.

There can be strength in numbers.  And many Trusts are administered with skill and grace with two Trustees at the helm.  But not every partnership is successful.  When a two-headed Trustee decides to argue with itself, disaster abounds.

Sometimes two people appointed to act over a Trust estate simply do not see eye-to-eye.  They may disagree on investments, or distributions, or other management of Trust assets.  They each have duties and obligations to the Trust, but every Trustee can interpret how to act out those duties and obligations differently and still be within the range of reasonableness.

Worse yet, under the default rules of California Trust law, co-trustees must act unanimously if they are to act at all.  This means that one Trustee cannot simply break a deadlock by acting on his own.  One of the Co-Trustees does not have the power and authority to act alone.  Of course, the Trust document can change this requirement and allow one or both of the Co-Trustees to act alone, but Trust provisions rarely provide for that.

If Co-Trustees cannot agree on how to act or how to administer the Trust, then the horror of the two-headed Trustee comes to life because nothing gets done.  Further, the Trust administration can turn into an ugly scene of chaos and destruction taking far more time, money, and emotional toll than is typically required to administer a Trust.

Ultimately, Co-Trustees can either resign or be removed by the Court, but that takes Court action—costing time and a good deal of money.  Plus, you never know how the Court will rule when asking it to intervene in Trust affairs—it may not go your way.

The solution, therefore, lies in choosing the right heads to put together as a two-headed Trustee in the first place.  Naming two people to act just because you think two heads are better than one may back fire if the two heads you name can’t work well together.  Do you want your Co-Trustees to be a successful working partnership or do you want to see the horrors of a bad Trust administration?  The choice is yours, put some thought into the decision and then choose wisely.

Choose Wisely: Some considerations for choosing a good Trustee for a California Trust.

Posted by Keith A. Davidson on October 21, 2011

The biggest decision for anyone creating a revocable, living trust is the choice of Trustee.  A Trustee acts as the manager of the Trust assets.  They call all the shots, make all of the important decisions, and decide when and how the Trust assets will be distributed.  The Trustee is in a very powerful position, and like all positions of power, there are those who abuse their power to the detriment of the Trust beneficiaries.  This is why it is important to have a Trustee that you can trust.

Yet so many people create California Trusts without giving their selection of a Trustee much thought.  In part, this is due to the limited choices most people feel they have in selecting a Trustee.  Typically, the choice is made among the Settlor’s (a Settlor is the person creating a Trust) children.  This may work a majority of times, but it can also lead to a great deal of tension, which then sets the ground-work for lawsuits being filed by Trust beneficiaries against the Trustee.. 

In my opinion, having seen the worst case scenario of Trusteeship time and again, the following are a few of the factors you should consider in selecting your Trustee:

  1. A Capable Trustee.  First, and most importantly, you need a Trustee who can do the job.  Being a Trustee is a thankless position.  It is a position of power over assets, but it comes with a large number of duties and obligations imposed by California law and the Trust document.  If a Trustee fails to perform properly, then he or she is personally liable for any damages caused. 

 

Therefore, you need someone who has the ability to (1) manage financial assets, (2) follow directions as outlined in the Trust terms and the California Probate Code, and (3) manage the personalities of the beneficiaries.  Each of these elements is vitally important to a well-managed Trust.  Does that mean that your oldest child should be Trustee?  Not necessarily.  The more important question is who is capable of being a good Trustee.

 

    2.   An Independent Trustee.  There are choices for a Trustee outside your immediate family.  This includes corporate Trustees and so-called “private professional fiduciaries.” 

 

Corporate Trustees are financial institutions that act as Trustees of Trusts.  Some corporate Trustees require that the Trust have a minimum amount of assets before they will agree to act.  The benefit of a corporate Trustee is that they are in the business of managing Trusts.  They tend to be good at it.  And they have a team of professionals to oversee the Trust administration.  The downside is that they also tend to be the most expensive option—charging anywhere from .75% to 1.5% of the Trust assets on an annual basis. Additionally, Corporate Trustees are unlikely to have a personal relationship with the Trust beneficiaries, which means they will not know the individual needs of Trust beneficiaries like say a family member Trustee would.

 

“Private Professional Fiduciaries” are individuals who make their living acting as Trustee for people.  In California, private professional fiduciaries must be licensed.  Since they are in the business, they are good at managing Trusts and they tend to charge less than a corporate Trustee.  And good private professional Trustees can help manage both the assets and the relationships between the beneficiaries.

 

     3.  A Well Informed Trustee.  Whatever Trustee you choose, don’t forget to find out if that Trustee is well informed about handling Trust administrations.  This goes even for family members.  Why not talk to your child who you have named as successor Trustee to see whether (1) she even wants to act, (2) she knows what her duties are, and (3) she knows what your expectations are for management of the Trust estate.  This rarely occurs, and yet it could be very beneficial to the Trust administration.

The choice of Trustee is yours, but put some thought into that choice and choose wisely. 

Will and Trust Creation: The basic requirements of California Trust and Will creation

Posted by Keith A. Davidson on August 29, 2011

Keith A. Davidson describes in this video the basic requirements for creating a California Will and Trust. He refers to the basic creation elements as "formalities" and "intentionalities", terms he uses in teaching California Will and Trust creation at Chapman Law School (which he borrowed from his own Trust and Will professor, Father O'brien (thank you Father O'Brien!), who taught at Loyola Law School in Los Angeles).  For those viewing this blog by email subscription, you can click on the title for a link to the video. 

The Childish Balancing Act-How to Plan for Children in Your Trust.

Posted by Keith A. Davidson on April 08, 2011

Children are a big part of Trust planning, and a big part of Trust litigation (lawsuits) when the planning falls apart (or is not done properly to begin with).  There are many factors that affect planning for children, including age, marital status, health, legal or creditor issues, and level of responsibility (or rather perceived level of responsibility by the parent).

Age Issues:

Age is easy to plan for in that a child’s trust can be created to hold assets until a certain age.  Choosing the “certain age” is a highly personal question to answer.  As a starting point, a child must be a legal adult to receive assets, which is at age 18 in California.  And most people agree that ages 19, 20, and even 21 are too young for a child to receive anything substantial.  In fact, research has shown that the Prefrontal Cortex-the part of the brain that controls reasoning and impulses-does not fully mature until age 25.  So a scientific argument can be made that age 25 is a good minimum age to work with, but does it apply to every case?  Sure, why not.  If nothing else, age 25 is a good starting point.  What about an age other than 25, like 30, 35, or 40?  That’s where personal preference comes into the mix.  Of course, it’s not an all or nothing proposition because a Trust could allow a portion of the assets to be distributed at age 25 (say ½ or 1/3), and then use other ages for the remaining distributions.  You can be as creative as you like in setting the “certain age” for distributions.

Marital and Creditor Protection Issues:

Age is only one part of the equation because keeping assets in trust for a child also impacts marital property issues and creditor protection.  By placing a child’s assets in trust it can (i) protect those assets from creditors, and (ii) help the assets retain their character as the child’s separate property (this applies in California, which is a community property state, but inherited assets are, by definition, separate property).  So as long as the assets are in trust, they have some protection in case of creditors or divorce.  This may be helpful if the child is in a high-risk profession, such as a doctor, lawyer, stuntman, dare devil, motor cross, etc.  But the protection only lasts for as long as the Trust is in existence.  If the trust provides for distribution at a certain age, such as 25, then the creditor protection ends at age 25.  The trust could continue for the child’s entire lifetime if this is a concern.  But you have to balance the inconveniences of the trust with the protection being provided. 

Health Issues:

Children with health issues can face substantial costs for medical care in the future.  A child’s trust can be created so that the child will qualify for government assistance, but have trust assets available for extraordinary expenses that add to the child’s comfort.  Known as “protective”, “Medicaid”, or “Special Needs” trusts, these devices can be helpful for children in need.  In this case, the trust would remain in existence for the child’s lifetime, so the age question is no longer a concern.

Level of responsibility:

This is the real issue parents grapple with in determining a proper age for distribution.  How responsible are your children?  Perhaps the more important question is: how do you perceive your child’s level of responsibility? 

Before I had children I had a hard time understanding why continuing trusts for children were such a big deal—let the children have their cake, I thought.  Not anymore.  As the father of two boys I now understand just how perplexing the question of responsibility can be.  I also know that every child is different and my perception of each of my children may vary from their actual level of responsibility.  And it is my perception of responsibility that matters because that is what will drive my decisions in planning for my children.

So take a good look at your individual situation and ask yourself, what do you think is best for your family?  There are many variables and options to choose from to help your children.  But your opinion is the only one that counts when creating your own trust.