Building the team: vetting trustees and advisers

A U.S. citizen scenario

Consider a U.S. citizen who is a beneficiary of a trust and is evaluating a proposed trustee and investment adviser. The starting question is who would hold each responsibility under the trust instrument and engagement documents. The IRS describes a trustee as holding legal title to trust property and exercising management powers for beneficiaries according to the governing instrument.^[1] Questions put to each candidate commonly cover the work it would accept, the people responsible and how decisions would be documented. A proposal typically sets out who answers questions about distributions, investment instructions and missing records.

The firm and the scope of its authority

Questions about the contracting firm commonly start with its full legal name, its regulator and the licence or registration category it relies on. Next come the activities that category covers and whether the proposed engagement falls within it. The relevant authority's own register is where an entry can be confirmed independently.

Registration is not endorsement. A register entry can identify the contracting entity, an affiliate or an individual, and can note restrictions that affect the proposed work. Where a firm relies on an exemption or exclusion, its written explanation and supporting authority are the documents that matter, and they cover the actual services proposed, including any work assigned to another firm.

U.S. treatment: the family office exclusion

Under the SEC family office rule, the exclusion from the Investment Advisers Act definition of investment adviser requires all three conditions together: the company has no clients other than family clients, is wholly owned by family clients and exclusively controlled by family members and/or family entities, and does not hold itself out to the public as an investment adviser. The rule defines the relevant terms.^[2]

A firm invoking this exclusion is asked to explain how its client relationships, ownership and control satisfy those conditions. A business label alone does not answer those questions.

State treatment: who makes each decision

Each proposed role connects to the governing instrument and applicable state law. Delaware law permits an instrument to give a protector powers that include removing and appointing trustees or amending the instrument. Those powers depend on what the instrument grants.^[3] Who could exercise such powers, what conditions would apply and how the decision would be recorded are the usual follow-up questions.

Wyoming's directed-trust provision can place fiduciary responsibility for directed duties with the person performing or directing them, while treating the trustee following that direction as an excluded fiduciary for those duties.^[4] Its distribution provisions also allow specified powers to be exercised in a nonfiduciary capacity, with a different consequence for the trustee's status.^[4] How the allocation applies to a proposed role depends on the written terms of the instrument.

How fees and conflicts are handled

What would the complete engagement cost, and which services would require a separate charge? A written schedule typically addresses routine administration, investment management, distributions, unusual transactions and termination, along with how charges would change if another professional were engaged and who would approve additional work. Conflicts are a separate topic. A proposed trustee may have an ownership, referral or other business relationship with the recommending adviser, and someone may receive compensation when the trust uses an affiliated service or investment product. How the firm documents the conflict, communicates it and decides whether to proceed describes its handling of incentives, and an affiliation is not by itself evidence of misconduct.

Discipline records and what they distinguish

Each public register and disciplinary database applies to particular work. A search by exact legal name and identifying details separates a candidate from someone with a similar name. A record shows the conduct, the proceeding's status and any restrictions relevant to the engagement, and an allegation, an investigation, a finding and a conviction describe different things that stay distinct in any assessment. The underlying record, not a summary of it, is the source for conclusions, and a candidate can explain any relevant entry. The absence of a located entry says nothing about competence or service quality.

Recordkeeping and communication

What sample account statement could the candidate show without disclosing another client's information? Related questions cover how transactions are reconciled, who can authorise payments, how a beneficiary requests an explanation and how inconsistent instructions or an unexplained balance get resolved. How would the team distinguish a binding instruction from a statement of preferences? Delaware law says a letter of wishes is not binding on a trustee or other fiduciary and creates no duty to follow it.^[3] The effect of each proposed document depends on the applicable law. Decision records and the communication of reasons for a discretionary decision are the remaining points.

Warning signs and the eventual handover

Does the candidate resist identifying the contracting entity, explaining compensation or documenting decision authority? Would the reader be pressed to sign before receiving engagement terms? These responses leave unresolved questions about the proposed engagement. Documented explanations answer these questions, and an unanswered question is not a finding of misconduct.

What would happen if the engagement ended or the responsible professional became unavailable? Successor acceptance, outstanding fees and the transfer of records and property are the points involved. Wyoming law generally continues a departing trustee's duties until delivery, subject to specified exceptions, and requires expeditious delivery to the appropriate recipient.^[4] The OCC handbook also advises a bank considering successor trusteeship to examine previous account activity and trust holdings before acceptance.^[5]

Scope and status

A family office label does not establish an investment adviser exclusion, a tax exemption or a reporting exemption. The SEC exclusion needs all three conditions: only family clients, wholly family-owned and family-controlled, and no holding out to the public as an investment adviser. An office serving unrelated families generally must register or find another exemption, and state law may apply.

Questions and answers

Related pages

• Licensed trustees and trust companies | OffshoreTrusts.com: Trustee rules depend on the jurisdiction and the trust's activity. Regulated trust company business sets who may act as trustee for U.S. citizens' trusts.
• Protector powers, consent and duties | OffshoreTrusts.com: A trust protector is defined by the powers an instrument grants, including trustee removal and appointment, and by how governing law treats the protector role.
• Corporate trustee | OffshoreTrusts.com: A corporate trustee is a corporation under Jersey law. The law explains how it acts for a trust and relates to an individual trustee or trust corporation.
• Letters of wishes and trustee discretion: A letter of wishes guides trustees within defined limits and stays distinct from the trust instrument, raising questions of discretion and disclosure.
• How trusts fit a family office plan: How trusts fit a family office plan for a U.S. citizen, including trust classification, federal tax treatment, transfer questions and separate filing duties.