A previous post discusses who can legally be the trustee of Tennessee Investment Services Trust (TIST). A better question might be: who should be the trustee of a TIST?
Choosing the wrong trustee could expose a TIST to creditors. One argument in favor of piercing a TIST is that the trustee is beholden to the grantor. That is, a creditor might argue there is a tacit understanding that the trustee will simply follow the grantor’s instructions without exercising independent judgment. This is simply a version of the alter ego argument discussed here. Essentially, the argument is that the trust is a sham and thus should be disregarded.
The best way to avoid this argument is to appoint a trustee that has written policies and procedures for handling discretionary distributions. However, it is not enough to have the procedures. The trustee must consistently follow them as well.
For cost and other reasons, clients are often averse to using a corporate trustee for a TIST. Instead, clients may prefer to name a friend, family member, or trusted professional. Most individuals will not have established fiduciary procedures, and developing the necessary procedures from scratch can be time-consuming and expensive. Accordingly, naming a bank or trust company as trustee of a TIST will usually be the better, more protective option.
Posted by Joel D. Roettger, JD, LLM, EPLS