Choosing an Executor and Trustee with a Family Business

Choosing an Executor and Trustee UMass
with a Family Business

by Kevin M. Flatley
Director, Estate Planning
The Private Bank at Bank of Boston

For over twenty-five years, I have been involved in settling estate planning issues with Bank of Boston clients who own a family business.Over this time I have seen a dramatic change in the way clients choose an executor and trustee.

Early in my career, lawyers and other trusted family advisors routinely suggested a bank trustee, and it was usually a wise choice.The bank settled competing family claims to the business and other assets; advised the family of the future course of the trust; and invested the trust wisely.The bank also accounted to the state and federal tax authorities and the probate court, if necessary.Everything was done in one location, and a most disruptive time in life became somewhat settled.

In the past ten years, though, lawyers and other advisors came to realize that with a bank trustee, “control” passed to the bank, and other advisors were forced into the sidelines.Aware if this, the lawyer as trustee stepped forward.This trend toward lawyers as trustees in itself is not unsettling as some of Boston’s large law firms have been managing trusts for almost as long as some of the “younger” Boston banks.

However, the disturbing trend is toward financially unsophisticated family members who are named executor or trustee of a trust. Certainly there are family members who should be named in these roles–family members involved with the financial markets, those familiar with the company and its business, the savvy investors, those who know when to seek good counsel and who understand the importance of completing details on time.

Conversely, there are many instances in estate planning where a spouse is sold on the advantages of control. If the spouse or a child is named trustee, they can choose whomever they want to watch after the business, invest funds, prepare accountings, and make the sophisticated tax choices often required of an executor or trustee. Yet this control is sometimes illusory. The lawyer encouraging a client to name a spouse or a child executor usually keeps the original will in the lawyer’s vault, anticipating the family’s return to financial settle affairs upon death. This leads to a subtle loss of control.

Control in the family also comes with enormous risk. The lawyer might become less able with time, retire, or die. But even if the lawyer is present, we are asking a spouse or child to make one of life’s most important decisions within a few days of the death of a spouse or parent. You can also be sure that within those few days, there will be plenty of people offering help–the son-in-law stock broker; the neighborhood lawyer who can file the will and settle the estate, and who may not discuss fees or even be competent; or the “next husband” or “next wife,” who has a great investment in the garage and has always been prepared, if only the funding were at hand.

So, if a family member is not always the perfect choice to serve as an executor or trustee, what about a bank? A bank provides continuity and trustworthiness. But should there be a family member named to serve as a co-trustee, “for the personal touch ” to “soften” the hardened old trust officer, or to monitor the family business?

In this situation, the family member or the family friend can be a solid choice as a co-trustee; but sometimes the family trustee becomes the stern or cantankerous or combative co-trustee, and it is the bank officer who becomes a trusted friend of the family. Where the individual trustee is busy taking care of his/her own taxes, family emergencies, and health problems, the bank trust officer’s full-time job is dropping everything when called and taking care of the client’s needs.

We often look at individuals as trustees or co-trustees only in the present without considering their behavior in the next twenty-five years, when the trust is still alive. At that time, will this individual still be in a position to keep track of income and pay expenses, or to decide fairly what should be paid to the children or the grandchildren? Can this individual monitor investments given to the trust, including a family business? Who will your son as trustee be married to in twenty-five years? Is the family trustee free from conflicts within the business which might deflect benefits to company insiders away from the family? There is a well-known probate lawyer in Boston who claims that he has seen hundreds of trusts become muddled as individuals gloss over the details, but he has never seen a trust with a bank trust go awry.

Oh, banks are not perfect. With a bank trustee, there is a risk of a trust officer moving on, just as the family gets to know the trust officer, but this is a surprisingly small risk. At the Bank of Boston, for example, of our twenty officers in Boston, ten have been with the bank for twenty years or more. I have seen trust officers negotiate the first purchase of a new car for a young client. I have seen them dissuade an inexperienced investor from investing in a busted business that would never pay off. At any given time, there are as many a hundred family businesses held in trust at the Bank of Boston, where we value the company, oversee its operation, and assure full value for the family on sale.

It is usually the glittery things that draw a client to the bank as trustee. We have had excellent investment results. We have a long history maintaining family businesses in trust. We have had strong results from investing in emerging growth companies and international stocks. The tax savings from trusts can save a family hundreds of thousands of dollars. Ask a client of the bank what keeps them here, and I’ll bet repeatedly they’ll cite their trust officer as one of their dearest friends.

We encourage you to keep the right to remove the bank as trustee, but we find that exercising this right does not occur often. Your kids, your nephew, or your trusted family friend may disappoint you, but the bank is ever present at your business’ time of need.

Reprinted with permission of the UMass Family Business Center, online at www.umass.edu/fambiz.