Broker Check

Considerations in Choosing a Trustee

December 13, 2022

As you plan for your financial legacy, you may create one or more trusts to secure and convey assets to your future heirs. Chances are the trust(s) you create may exist long after you’re gone. And while a trust’s legal structure can make it irrevocable, it still needs the guiding hand of the trustee or trustees. Particularly with special trusts, those which depend upon decisions made by (or discretion of) the trustee, the character, abilities, and attentiveness of the trustee(s) can make big difference.

Trustees must often juggle many responsibilities. He or she (or an entity trustee) may be called upon to interpret the terms of the trust, direct how the trust’s assets are invested, ensure that distributions are made to your future heirs, maintain financial records, and file tax returns and court reports.

The trustee is responsible for administering the trust’s assets with the care and skill of a prudent person (or standard of state law or the agreement) managing property. For example, if a trustee’s investment choices may be covered by the “prudent investor rule,” which is a standard of conduct included in the Uniform Probate Code. The trustee is not responsible for always making profitable investments or achieving an unreasonable rate of return. If the stock market falls, the value of a trust may also decline.

When creating a trust, the grantor should consider the position of trustee carefully.

When creating a trust, the grantor should consider the position of trustee carefully. The grantor may have a big pool of candidates from which to choose, because in most jurisdictions almost any competent adult can qualify to serve as a trustee. Generally, and depending on the type of trust, family members may be allowed to serve as trustees. Before nominating them, check with your financial team to make sure that your friends and/or family are not disqualified (e.g., for tax goals and objectives) from serving as trustees.

Some restrictions also apply to the naming of professional advisors, individuals who are not citizens of the United States, and certain institutions. A trustee doesn’t have to be a lawyer or a bank officer. In general, a grantor may nominate a friend, a member of their family, a corporate trustee, or a professional advisor such as an attorney or accountant.

Your chosen trustee should be not only willing, but available. A dedicated explorer who spends half the year trekking across mountain ranges may not be the best choice.

The trustee may also be a beneficiary of the trust, but you should give serious consideration to possible conflicts of interest and potential tax issues before appointing such a trustee.

Personal Friend

A trust may last for decades.

Nominating a friend of the grantor to be the trustee, his or her personal concern for and knowledge of your family can be important benefits. A friend may be more capable than a family member of making objective decisions and resolving disputes among future heirs.

One thing to consider is age. If the grantor of a trust is eighty-five years old and a college buddy is also eighty-five, the unfortunate fact is that he or she may not live long enough to effectively oversee the trust. A trust may last for decades. If choosing a friend as trustee, the grantor should also nominate one or more successors who can be asked to serve in case any trustee cannot or does not want to serve or passes away. If aa successor trustee is not named in the trust and one is required, a court will step in and choose one.

Another consideration is skills. If the friend lacks financial or management skills, he or she may need to hire professionals to help, which can drive up costs.

Family Member

On a personal level, a family member may be motivated to work in the trust’s best interests. He or she will already know the beneficiaries and may not charge trustee fees. But just as with a friend who is a trustee, his or her age, financial skills, and the ability to make objective decisions are also essential.

Grantors can name an individual professional advisor, or a corporate trustee such as a bank or trust company to be trustee.

Diplomacy is an important consideration. Grantors should want a trustee who possesses both sound judgment and good people skills and isn’t reluctant to sort out disagreements.

Before nominating any family member to be the trustee, consideration of the potential for conflict of interests and the exacerbation of family tensions. Trustees have the duty of undivided loyalty and the duty of no self-dealing. The duty of undivided loyalty means that regardless of the share of assets given to each of the beneficiaries, each must receive the same level of consideration and treatment unless the trust provides otherwise. The duty of no-self dealing means that the trustee cannot take personal advantage of their situation, and when he or she is also one of the future heirs, this can get sticky. Examples of self-dealing may include using trust property or connections for personal profit; selling, leasing, or borrowing trust property for the trustee’s personal benefit; acting on behalf of a third party who also deals with the trust; or engaging in business that competes with the trust.

Underlying family hostility, especially involving second marriages or when one child is named a trustee for others, can linger under the surface only to erupt after your death.

Corporate Trustee or Individual Professional Advisor.

Grantors can name an individual professional advisor, or a corporate trustee such as a bank or trust company to be trustee. The advantages of using either a corporate trustee or professional advisor are that they can be counted on to administer the trust in an objective professional manner, and they have the knowledge and experience to do what is required. Their mission is to carry out the terms of a trust while investing the funds to generate returns. A corporate entity, such as the trust department of a bank, also has longevity, so a grantor does not need to worry about beneficiaries outliving the trustee. The person who at any given time holds the position of trust officer at the bank is generally the person who oversees the trust.

A disadvantage of using a corporate trustee is the cost. Many corporate trustees and bank trust departments have minimum annual fees or fees based on a percentage of assets under management, which can reduce your legacy. Alternately, a professional advisor may charge a time-based fee to be paid by your trust or estate. Another potential drawback with a corporate trustee is that the trustee may not know the trust beneficiaries very well. To them, the beneficiaries may be just another group of clients of the bank. In addition, corporate trustees may have turnover, so as the years pass a trust may be controlled by a succession of trust administrators.

Naming a lawyer in a law firm, like any other individual, this person may leave the firm, requiring aa new trustee or someone else from the same firm to take over.

A Combination

By naming co-trustees, the trust beneficiary may benefit from a personal connection and professional skills. The professional advisor or institution may handle the “numbers crunching”— investments, taxes, and reporting duties. Meanwhile, a relative or friend could liaison with the beneficiaries and respond to their individual situations. Choose this strategy, when a trust is established, the trust should specify how the co-trustees are to resolve disputes and make decisions. This issue should be addressed with the corporate trustee, because many corporate trustees do not like serving with an individual co-trustee. Either way, before naming a corporate trustee, the grantor should interview and discuss the grantor’s wishes with each of the potential trustees, and make sure they are willing to serve, and that the grantor is comfortable with them.

Unhappy Family

Of course, a trust grantor wants to make the right choice, and most trustees successfully serve for the trust’s entire term. But on occasion beneficiaries are displeased with the trustee’s performance, or there may be other issues that may call a trustee’s judgement into question. To allow for this possibility, a grantor should include a provision in the trust for removing one trustee and bringing in another. The process should be carefully structured, however, to reduce tax issues and to make sure the trust beneficiaries aren’t able to alter the intent of the trust. One way to do this is to require that an independent third-party consent to the change of trustee.

Simon Says...

When you’re setting up a trust for the benefit of beneficiaries, it’s important to select the appropriate trustee. Consider expense, familiarity, skills, and the time frame. Work with your advisors, take time to consider the trust issues, and make the best choice possible.

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