Most of my clients have given great thought to protecting their assets and preserving their accomplishments for the benefit of their loved ones. Whether they have nurtured a successful enterprise, are operating a growing business, or are managing a portfolio of rental properties or marketable securities, they have clear ideas about what they want — and don’t want — regarding the distribution of assets to their children and grandchildren.
To ensure that their wishes are followed just as they envision, many of them choose to set up a trust. Once you make the decision to fund a trust as part of your estate planning, you must then select who can best carry out your plans. “Who do I choose as my trustee or trustees?” becomes a critical planning question.
Should my trustee be my spouse or child?
Being a trustee means accepting specific duties and the related liabilities under state law. These include, but are not limited to, impartiality between the interests of the current and future beneficiaries, properly accounting to all beneficiaries, prudently investing trust funds, managing trust property, and following the clear prohibition against self-dealing.
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It is imperative that you understand the strengths and weaknesses of your chosen trustee and that your chosen trustee appreciate his or her responsibilities and personal liability to the trust beneficiaries — which may include the trustee.
Questions to consider:
- Can your trustee separate his or her personal feelings and interests from those of the beneficiaries and exercise good judgment at all times?
- Will your trustee treat all the beneficiaries impartially if, for instance, your children are not your spouse’s children?
- Does your trustee have an ability to analyze investments?
- Will there be temptation for your trustee to take undue risk in buying investments hoping for a hefty return?
- Will a child who is balancing his or her family and career have adequate time to devote to serving as trustee?
Observations:
- Family members are closer to the beneficiaries and are more likely to understand their needs.
- A related trustee may charge the trustee’s costs to the trust but usually does not charge an administrative fee.
- Using a sibling as trustee can exacerbate tensions and resentments among the beneficiaries.
- A relative with no trust experience may abuse the trust through ignorance but will still be liable for substantiated damages.
Should my trustee be my attorney, accountant or other trusted adviser?
Attorneys, accountants and financial advisers often have special and trusted relationships with their clients. You may be looking for a person who understands your financial and personal goals and is capable of carrying out estate or other financial plans. However, even if an attorney, accountant or other adviser understands the nature of your business or your financial goals, he or she may not fully appreciate the scope of the fiduciary duty or the inherent risks and responsibilities of being a trustee.
Questions to consider:
- Can a legal or tax adviser understand the dynamics of your family?
- What experience does he or she have as a trustee?
- If there is a breach of duty that results in a significant financial loss to the trust, will the trustee be able to personally satisfy a judgment if professional malpractice coverage will not make the trust whole?
- Is the trust drafted so your beneficiaries can bring such an action against the trustee?
Observations:
- Professional advisers often charge higher administrative fees and costs than a corporate trustee who must compete on value.
- Appointing a family’s estate planning attorney as trustee may be a conflict of interest for the attorney.
Should my trustee be a bank or trust company?
Banks and trust companies, called corporate trustees, provide professional fiduciary services and can act independently. These corporate trustees have procedures and systems in place to manage property and invest funds in a fair and consistent manner. They have met capital reserve requirements for added solvency in case they are ordered to replace lost trust value due to a breach of trust.
Choosing a corporate fiduciary may reduce conflicts among family members while providing experienced and professional investment and administrative management. All fiduciaries are held to a very high standard, but this is truer for corporate fiduciaries who have been granted state or national charters authorizing them to provide professional fiduciary services.
Questions to consider:
- Will the corporate trustee invest the time to understand my family and their needs?
- What standards can I expect from the administrator whose decisions directly affect my family? Does the administrator realize the goals of my trust?
- Will a corporate trustee’s administration and investment services be worth the fees the trustee charges the trust?
Observations:
- Corporate trustees follow specific policies and procedures to ensure unbiased and professional services. In addition, they provide monthly account statements and written explanations for trust decisions.
- Corporate trustees publish their fees, typically charging between 1.0% to 1.5% of trust assets as the annual administrative fee, but fee concessions are often negotiable.
- Many corporate trustees centralize smaller trusts rather than provide local administration.
Would having more than one trustee be my best option instead?
You may find it best to answer some of these questions by choosing more than one person to serve as co-trustees, or to serve with a corporate trustee. It can be helpful to have a co-trustee in order to balance recordkeeping, investments and other trustee duties. A properly drafted trust agreement can expressly outline the duties of the various fiduciaries, such as the retention of specific investments, delegation of particular duties, and who may remove a trustee and appoint a successor. An individual co-trustee may have a particular understanding of a beneficiary’s needs and assist a corporate co-trustee in making discretionary decisions.
Many of the answers to these questions will depend on the size of the trust and the nature of the trust assets, but a trust need not be millions of dollars to influence the beneficiaries for better or for worse. It will be well worth your time to thoroughly discuss the trust with any person you may consider for trustee and to interview a few corporate trustees to understand how they work and what they can contribute to your family’s continuing success
Observation:
- Rather than a co-trustee with a corporate trustee, many families include a trust committee with various powers to advise the corporate trustee and power to appoint a successor trustee.
Putting it all together: What one client decided
One client of mine, a recent widow, felt that only one of her two sons needed a trust for his share at her death. However, she decided on a corporate trustee for both two sons, with separate and distinct trust agreements. The responsible son’s trust provides greater access to funds and input on trustee decisions in secret. The wayward son’s more restrictive trust will protect him, hopefully without feelings of resentment.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
