Having an estate plan in place is important for every adult; however, for doctors, dentists, optometrists, veterinarians, and other healthcare professionals the need for comprehensive estate planning takes on heightened importance. The complex nature of a professional practice coupled with the likelihood of owning valuable assets that need to be protected combine to make it likely at least one trust will be part of your estate plan. When you create a trust, you will need to appoint a Trustee to oversee the administration of that trust. Choosing the right Trustee is crucial to the successful administration of that trust.

Trust Basics

A trust is a legal arrangement that allows a third-party fiduciary (the “Trustee”) to hold assets on behalf of one or more beneficiaries. All trusts are broadly divided into two categories – testamentary or living (inter vivos) trusts. A testamentary trust does not activate until after the death of the Settlor (the person who created the trust). As the name implies, a living trust activates during the lifetime of the Settlor. Living trusts are further subdivided into revocable and irrevocable living trusts. There are also numerous specialized trusts designed to accomplish targeted estate planning goals, such as Medi-Cal, incapacity, or special needs planning, as well as asset protection, blended family planning, and charitable gifting. One thing that all trusts have in common is the need to appoint a Trustee.

Using a Trust to Distribute Estate Assets

A well-drafted trust can be used to accomplish a wide range of estate planning goals; however, one of the most common of those is avoiding probate. Probate is the legal process that is typically required after you die. Probate serves several important purposes, including identifying and valuing your estate assets and eventually distributing assets to named beneficiaries and/or legal heirs of your estate. Probate can take months to get through for even a relatively modest estate. Larger estates with complex assets, numerous creditors, or that become involved in litigation can take years to make it through probate. There are also expenses that go along with probating an estate, including court costs and fees as well as professional fees for your Executor, attorneys, accountants, and appraisers.

Some assets, however, bypass probate altogether. Assets held in a trust, for example, are not required to go through probate. That advantage alone is often a sufficient incentive to use a trust as the primary distribution method for your assets in your estate plan. Another benefit to using a trust instead of your Will to distribute assets is the privacy offered by a trust. Your Last Will and Testament becomes public record the moment it is submitted for probate. As such, anyone can find out how you chose to distribute your estate assets. A trust, however, does not go through probate, allowing the details of your estate plan to remain private. Ultimately, relying on a trust to avoid probate not only offers privacy and saves money, but it also means your loved ones do not have to wait to receive assets intended for their care and maintenance. As a doctor, dentist, or another healthcare professional, the need to avoid probate can be an important factor when deciding to create a trust if you have a financial interest in a professional practice. That asset alone could hold up the probate of your estate for months, making a trust an attractive alternative to ensure that your family is financially secure in your absence.

The Role of Trustee – Expectations and Responsibilities

To ensure that you appoint the right Trustee, you need to have a clear understanding of what will be expected of your Trustee. You may be tempted to appoint a family member or close friend as your Trustee simply because you trust that person to have your best interests at heart. While that is certainly a beneficial trait in a Trustee, your choice of Trustee should be based more on who has the experience, education, and skills needed to successfully administer the trust. Knowing what is expected of your Trustee will help you make the right choice. Common Trustee responsibilities include:

• Understanding and abiding by the terms of the trust. The trust agreement, created by the Settlor, will include the trust terms. The Settlor’s creation of those terms is virtually unhindered. The Trustee has a fiduciary duty to abide by the terms unless it violates the law, is impossible to implement, or is unconscionable.
• Protecting and managing trust assets. Your Trustee’s first – and most important – objective is to protect the trust principal. Initially, your Trustee may need to gather assets and transfer them into the trust. Later, your Trustee may need to sell trust assets. The Trustee may also be required to perform management tasks if trust assets include real property or other tangible assets.
• Investing trust assets. A Trustee is required to use the “Prudent Investor” rule when making decisions relating to trust investments. That rule dictates that investments should not risk the trust principal and decisions made using intelligence, discretion, and prudence.
• Keeping trust beneficiaries apprised of trust business. Trust beneficiaries have a right to be informed by the Trustee about important trust business. The Trustee must also make reasonable efforts to respond to inquiries and communications from trust beneficiaries in a timely manner.
• Distributing trust assets. Your Trustee is responsible for facilitating distributions from the trust to the designated beneficiaries. The trust agreement may include detailed instructions regarding distributions or may give the Trustee considerable discretion.
• Keeping detailed records of trust activity. Like other legal agreements, a trust can be challenged or may otherwise be subject to judicial scrutiny. For this reason alone, the Trustee should keep a thorough and detailed record of all trust activity.
• Filing tax forms and paying taxes due. A trust may be a separate legal entity that is subject to a variety of taxes. The Trustee is responsible for ensuring that the appropriate tax returns are filed each year and any taxes due are paid.

Things to Consider When Choosing a Trustee

Once you have made the decision to use a trust to distribute your estate assets, the next important decision is choosing a Trustee. It is a decision that should be taken seriously and only made after considerable thought and contemplation because your Trustee may very well be the most important factor in the success or failure of the trust you create. When choosing your Trustee, consider the following:

• Should I appoint a single Trustee or Co-Trustees? As the Settlor of the trust, you have the option to appoint a single Trustee or two or more co-Trustees. There are advantages and disadvantages to both options. With a single Trustee, decisions are easier to make and action easier to take regarding trust business. With co-Trustees, however, you are not relying entirely on one person to make the right choices and take the appropriate actions.
• Is a professional Trustee a better choice? When a trust includes valuable assets and/or complex terms, appointing a professional Trustee should be considered. Family members and friends may be trustworthy; however, a professional Trustee may be better equipped to successfully administer a complex trust. Attorneys and banks are frequently appointed as the Trustee of a trust when a professional Trustee is needed.
• Who has a legal and/or financial background? Administering a trust requires the Trustee to understand applicable laws and have a decent grasp of financial concepts. While many Trustees hire an attorney and/or accountant to assist with the administration of the trust, appointing a Trustee with experience in the legal and/or financial field decreases the likelihood of costly mistakes being made during the administration of the trust.
• Who will respect your wishes and honor your intentions? Your trust terms will dictate how much discretion your Trustee ultimately has; however, all Trustees have some discretion when administering a trust. When making discretionary decisions, your Trustee is legally obligated to make decisions with your stated trust purpose and intent in mind. Nevertheless, you should appoint a Trustee who you believe will respect and honor your beliefs and wishes – even if they directly contradict his/her own.
• Who is least likely to spur conflict? Appointing a family member – especially if they are also a trust beneficiary – can lead to conflict among your loved ones. That conflict can result in litigation if a trust beneficiary does not agree with your choice of Trustee.
• Who is most likely to remain impartial? Your Trustee must make all trust decisions guided by what is in the best interest of the beneficiaries, including future beneficiaries. Despite that legal requirement, it can be difficult to remain impartial when making decisions if the Trustee has a preexisting relationship with trust beneficiaries.
• Who has the time and ability to be your Trustee? Administering a trust can be a time-consuming job for the Trustee. When deciding who to appoint, make your prospective Trustee has the time to devote to acting a Trustee. Also consider things such as where your Trustee lives, especially if your trust owns real property or a business. Your Trustee will be responsible for managing and maintaining those assets which can be difficult to do from far away.
• Who is willing to serve as Trustee? A surprising number of people appoint someone to be the Trustee of a trust without discussing the appointment with them first. Not only is acting as Trustee an enormous undertaking at times, but a Trustee can be held personally liable for errors made while administering the trust. Failing to discuss the appointment with your chosen Trustee can lead to the Trustee declining to accept the appointment when the time comes to administer the trust. To avoid this common mistake, sit down and discuss your decision with a prospective candidate to make sure that he or she is willing to accept the appointment.
• What happens if the Trustee cannot/will not serve? If your trust will be used to distribute your estate after you are gone, remember that you will not be here to choose a replacement Trustee if one is needed. With that in mind, always appoint at least one successor Trustee and include a method within your trust terms for choosing a Trustee if the need arises. If you are silent on the matter, a judge could be forced to appoint a replacement Trustee without your input.

If you need help creating or making amendments to your estate plan or have questions, contact Dental & Medical Counsel by calling 925-999-8200 or by submitting a contact us form to schedule a complimentary consultation with attorney Ali Oromchian.