There are two types of trusts – revocable and irrevocable. Revocable trusts are run by the parents and then the trusteeship is passed on to one or more children after your death. Irrevocable trusts are either living – made during your lifetime – or testamentary, which are created by your will and only come into being once you die.
It would be cheaper – in the short run – to have one of your children act as a trustee. However, for anyone who has done this work for their parents – and received nothing for it – you realize this is not a great job to have.
You must take care of all of the taxes including filing income tax statements for the trust, make sure property insurances are paid, make sure the payments of income are received and distributed. In short you, as a personal trustee, get to do what you would have done as if you owned the property outright. It's just that you don't get paid for it.
That being said, many personal trustees would and still do a fine job. However, no matter how well you, as a trustee, do things, some of the beneficiaries are going to disagree with what the trustee is doing – whether it's the rent charged or how the property is managed, or 'why isn't it sold so I can take my money out?' It's a thankless, time consuming job and at best, you're not going to make everyone happy all of the time, and you get paid nothing for doing it – in most cases. If you do get paid, then the other beneficiaries are questioning why you get more. It's a no-win situation. One way to mitigate this grief for the trustee is to name co-trustees (two children) to your trust so as to 'spread the blame' if you have an issue with one of the beneficiaries.
Many people are setting up testamentary trusts in their will and leaving their children as trustees. However, with lifespans increasing, many trustees are well into their sixties and seventies when they take the on the job of trustee on after the death of Dad and Mom. If you have a trust that spans a few generations, you know sooner or later this trustee may be incapable, unwilling or unable to perform the duties of a trustee. Most testamentary trusts created in wills have no backup plan in the event this happens and now we have mass confusion as to who is to be the trustee.
Then what? Do you name one or two of the grandchildren to act as trustee should your first line of trustees is now incapable of handling the duties? Are the grandchildren mature enough, seasoned enough or as attached to the family farm as your children were?
There's a line in The Godfather – “I’m gonna make him an offer he can't refuse”, spoken by Marlon Brando. The reason I bring this up is farmland and minerals and other assets have now risen in value to the point in our area that there's a lot people making 'offers he's not gonna refuse'. If someone comes to you – as a trustee – and tells you that he's going to make you a multi-millionaire if you sell the property to him, how many grandchildren in this third generation are not going to bend to that pressure?
Here is the difference between a commercial trustee and a private or personal trustee. If you tell a commercial trustee they cannot sell the land, they cannot sell the land, period. If you make your children – and all the unknown trustees who fill in for your children as time marches on – as trustees, the chances your trust will stay intact are fifty/fifty.
Many people have a safe deposit box and they pay the fee for storing their valuables. A trust through a bank is a great big safe deposit box where you can store your land, your minerals, your most long-term valuables you own – and the key as to how they come out, when they come out, and to whom is held by a commercial trustee based on what you've told the trust department to do. You make the key!
Next time, we'll talk about mineral trusts and why minerals – as well as farmland – have become such valuable Legacy trust assets and in a cash business like minerals, you probably want professional management.