The CPA As Trustee — To Be or Not to Be

October 19, 2006

Published in the AICPA's Wealth Management Insider

You have the integrity and the financial skill for the job, but do you have the stomach for it?

You are meeting with a long-time, elderly client when she unexpectedly pays you the ultimate professional compliment: "Would you serve as trustee of my trust when I'm gone?"

You flush with pleasure. There is no higher indication of your client's trust in you than her request that you step into her shoes and manage her family's finances after her death.

But hold on a minute. Didn't she tell you just last week that her children could not be in the same room together without screaming at each other? Isn't your client's own mother suing her over the administration of her father's estate? Doesn't your client's 50-year-old able-bodied son still live at home? Maybe this isn't quite the honor you thought. You start to wonder: Will I be stepping into her shoes, or stepping on a landmine?

The CPA As Trustee

For many reasons, you may indeed be the perfect choice to serve as trustee for your client's trust. You know your client's finances better than anyone, you have the skill and the integrity, you probably know your client's philosophy about money and you have an organization in place to do the necessary bookkeeping and reporting. However, before you make this important decision, here are some things to think about.

• What is it you will be asked to do as trustee?
  A trustee has three basic responsibilities: the trustee must manage, invest and preserve the trust assets; keep proper records and file accurate tax returns; and make the required distributions, including those requiring the trustee to exercise his or her discretion. The duties of the trustee may extend for only a few months if the assets are to be distributed outright to the beneficiaries, or may last for the lifetime of the beneficiaries.
  
  For example, if you are the trustee of an insurance trust where the main purpose is to keep the insurance death benefit out of your client's taxable estate, your trustee duties may end after collection and distribution of the insurance proceeds. On the other hand, if you are the trustee of your client's revocable trust and your client has minor children, incapacitated adult children or intends to make maximum use of her generation-skipping exemption, the assets may be held in trust for the lifetime of the client's children, or longer.
  
  
• How will your performance as trustee be judged?
  In most states, a trustee must adhere to the so-called "prudent person" standard in administering the trust. If you don't happen to know any prudent persons, they are the imaginary folks who use reasonable care, skill and caution under the circumstances then prevailing. Perfectly clear, right?
  
  For investment of the assets, most states use the Uniform Prudent Investor Act, which gives a little more guidance and actually lists some circumstances that are appropriate for the trustee to consider when investing the assets, such as expected tax consequences of investment strategies, needs for liquidity in the trust to meet distribution requirements or the role of each investment within the overall risk/return strategy of the portfolio.
  
  What does this really mean? It means that a trust estate of any significant size or complexity should be managed by professional investment advisors, and your job as trustee in this case is to interview, select and monitor the manager.
  
  However, beware of complacency. Litigation against trustees is a growing area of practice for plaintiff's attorneys, and one way to expose yourself to litigation risk is to delegate too much responsibility with too little oversight. Even with a highly respected professional portfolio manager in place, you need periodically to review the manager's performance. Even trustees of insurance trusts, who historically needed to do little more than pay the annual premium on the policy in the trust, are now under a heightened duty to periodically reevaluate the policy against new insurance products to see if the particular insurance policy is the best available to meet the client's goals.
  
  
• Compensation - Are you being asked to do two jobs (or three) for the price of one?
   Most trust instruments say that trustees are entitled to "fair and reasonable" compensation. One thing you can count on is that your idea of "fair and reasonable" will differ from that of the beneficiaries. The best solution is to discuss this with your client now and have the trust instrument be explicit on the following points:
  
  
• The trust instrument should offer guidelines on what is "fair and reasonable" compensation for a professional trustee. Most professional trustees' fees are in the range of one percent to one and one-half percent of the principal balance of the trust each year, decreasing as the trust gets larger. To avoid any dispute with the beneficiaries, these fees should be discussed with your client now and spelled out in the instrument.
• The trust should be clear that the trustee may employ other professionals to advise or assist him or her, and that these professionals may be compensated over and above the fees paid to the trustee and in accordance with their normal rates, regardless of any relationship they may have with the trustee. This assures that you can hire your own CPA firm to prepare the tax returns, for example, without concern over any potential conflict in that engagement.
• If you act in two capacities: CPA and trustee, then you should be compensated for both, and it is best if you discuss this with your client and that the client's trust instrument be very clear on this point.
• The trust instrument should also provide that a trustee would be indemnified from the trust estate for any losses (including attorneys' fees!) incurred while acting in good faith.
  
  
• Who, if anyone, will serve with you?
  Clients often think it is a good idea to name as many people as possible to serve at once, but if you have ever been on a committee, you know that there is an optimum number that you should not exceed if you want to get anything done. Two or even three concurrently serving trustees can be sensible, but four or more is unwieldy. Be sure your client has a good reason for the composition of the trustee board. Trying to appease a family member whose feelings may be hurt is not a good reason to name someone as trustee. However, naming two individuals with different skill-sets can be a good solution, so long as there is a procedure to resolve a deadlock.
  
  
• What type of assets will you be managing and do you have the necessary expertise?
  Clearly real estate or closely-held businesses require different management skills than cash or stocks and bonds. You don't necessarily need the skills yourself, but you must solicit expert advice as needed. Acting as trustee of a family business held inside a trust is one of the most challenging jobs you can accept. Not only will you have the difficult job of assuring the continued operation of the business during a rocky transitional period, or perhaps negotiating a sale of the business if that makes sense, but you can be certain the goals of the beneficiaries will not be aligned with each other. Emotions will run high, sibling rivalry and jealousy may interfere and any beneficiary who has been involved in the business at any level will likely believe that he or she should have been chosen as trustee. Feelings may range from resentment to outright hatred. This area, above all others, merits frequent, continuing discussions with your client and your client's other advisors.
  
  
• Does your client's trust instrument give you enough guidance on exercising your discretionary powers?
  Frequently, the trustee will be charged with distributing as much income or principal as the trustee determines advisable for the "health, education, maintenance and support" of the beneficiary, or according to a similar standard. This standard derives from the tax code and is not very enlightening as to the real desires of the grantor. We often encourage our clients to write a non-binding side letter to their Trustee explaining how they would like the Trustee to apply the distribution standard. This gives the grantor the opportunity to convey to the Trustee something he or she might not want to put into the trust instrument, but that may bear on the way the grantor desires the Trustee to act. For example, if one child has a drug history or is a spendthrift, the grantor may want to offer more guidance on distributions without overtly treating the child differently from his or her siblings in the trust instrument. Encourage your clients to think about this issue and about the types of discretionary payments they might want the Trustee to make. For example, would the grantor want their Trustee to use trust funds to pay for a child's wedding, and if so, how lavish? What about helping a beneficiary start a business or buy a house?
  
  Keep in mind that you may have to balance the needs of current and future beneficiaries, which is another area where litigation often arises. The allocation of receipts and disbursements to or between principal and income, the allocation of capital gains to trust income and the conversion of a trust to a unitrust are all examples of areas for which the guidance of legal counsel can assist you in meeting your fiduciary duties.
  
  
• Do your client's family members know you have been selected?
  The transition of control at your client's death will be much easier for everyone if there are no surprises. Encourage your client to tell his or her beneficiaries that you have been selected and why, and encourage meetings now, while your client is alive, at which you can meet and get to know the family members.
  
  
• Do you have a relationship with your client's estate-planning attorney?
  Your client is best served by a team of professionals working toward a common purpose. Your client's estate-planning attorney should be willing, assuming client consent, to discuss the client's trust instrument with you, explain any unique aspects of the trust and assist you in making the decision to serve.

Conclusion

There are few professionals as uniquely qualified to serve as Trustee for a client than the client's own CPA, but without proper planning this highest of honors can turn quickly into the cruelest of punishments.

To make this a rewarding experience, speak with your client openly about family tensions they expect to develop, your client's goals and desires concerning discretionary distributions, your fees and liability protection and seek professional legal advice to assist you in fulfilling your duties as a fiduciary.