Trustee Selection Plans in the Age of Increased Lifespans

BY Douglas McCreery
CM Wealth CEO, Managing Member, and Partner

For families with significant wealth and the objective to perpetuate that wealth for the benefit of multiple future generations, determining the process by which successor trustees are selected and governed is one of the most important decisions that must be resolved by family leadership.

Individual trustees in an era of increased lifespan

If the trustee’s task is limited to gathering assets and distributing them outright among living beneficiaries, then an individual trustee with a designated backup may be sufficient, because the length of time needed to complete the tasks is relatively finite. Selection in this instance is often based on placing confidence in trusted family members or business advisors and can work well if the time frame is relatively short.

However, longer planning horizons brought about by increasing life expectancy has made the trustee selection decision more difficult, with far less certainty of a good outcome for the family. It’s common now for families to have four or five generations alive at once. A recent projection of life expectancy for children born this year is 87 years for boys and 90 for girls; the same study projects that 14 percent of boys and 19 percent of girls are expected to reach 100.

If the objective is long-term management, preservation, and growth of a business or financial assets, a decision maker must focus on how future trustees are selected, not just on trustees known when the estate planning instruments are signed.

Previous approaches to long-term trustee selection

Historically, the problem of long-term trustees has been resolved by choosing a bank trust department or similar corporate trustee as permanent successor.

This approach has numerous weaknesses. Institutional trust officers come and go, so often the officer doesn’t develop a feel for family dynamics. Rigid policies to safeguard the institution can obstruct decisions important to family members. Institutional mergers and/or acquisitions alter the future character of the corporate trustee in ways that can’t be anticipated in present time.

Modern approaches to long-term trustee selection

One modern approach to the problem of long-term trustee selection is to empower individuals you trust today to make future selections. This can be accomplished in a traditional trust document that sets forth current trustees and grants them power of future trustee selection.

A variant of this approach is to authorize family member beneficiaries—say, those over age 35—to determine the successor by vote (majority rule or a higher threshold, such as two-thirds). Often this language includes a restriction that the trustee must not be a beneficiary, to help minimize family squabbles and encourage impartiality.

There are several weaknesses in this approach. It’s often divisive, with minority views simmering and boiling over in spurts, and individual trustees are subject to legal disputes and held to high standards as fiduciaries.

Legal safeguards for private trust companies

To address these pitfalls, Ohio and about a dozen other states have enacted legislation to let families establish an individual private trust company with trustee powers, but only for the subject family.

This approach grants elements of corporate governance on the trustee framework. A private trust company has a board, usually consisting of family members and voting or non-voting professional advisors, who collectively exercise the trustee powers of the company. The board can be populated as circumstances require into separate committees, handling matters such as elective distribution, investment decisions, policy direction, and charitable gift decisions

A private trust company helps cultivate objectivity and protect individuals from claims of bias. For families with significant wealth and a long-term focus, a private trust company may be the best gift a family leader can bestow on future generations.