“How do I choose the right trustee?”
This is a question we frequently hear from families engaging in estate planning. The trustee is the legal fiduciary with responsibility for managing and administering trust assets for the beneficiaries, such as children, grandchildren or other loved ones, in accordance with the trust’s terms. In setting up a trust, one of the most critical decisions the trust creator (or “grantor”) makes is who to name as trustee.
As the name implies, a trustee should be someone you trust, but there is a continuum of choices with different attributes. In this piece, we will focus on the most common trustee options and delve into key considerations as you explore the right solution for you and your family.
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Choosing an individual as trustee
A family member or close family friend is often considered a “go-to” trustee choice. This person has the benefit of understanding the family dynamics and is implicitly trusted to maintain confidentiality. Generally, a family member or friend will be able to lend some financial acumen while performing the job for little or no fee, making this a highly cost-effective option.
However, there can be drawbacks. The trustee may be influenced by their personal relationships, which could cause them to make decisions that are ultimately not in the best interest of the trust parties.
The lack, or reduced amount, of compensation can also pose problems if the role becomes time-consuming, leading to trustee responsibilities being on the “back burner” or creating resentment.
And any individual acting alone introduces an element of “human risk,” meaning that the unexpected can happen (e.g. illness or death), so it’s important to identify successor trustees or appoint co-trustees.
Selecting a private fiduciary
A private fiduciary is a third-party professional who brings specific knowledge to the role of trustee, generally in-depth legal, tax and/or financial expertise. Grantors may choose to use a private fiduciary to ensure their trusts are administered professionally by someone who is not involved in the family dynamics.
Compared to other professional options, such as a corporate trustee, a private fiduciary typically has fewer clients and may provide more personalized service, taking time to get to know a family’s circumstances and sensitivities.
A private fiduciary will generally charge less than a corporate trustee, although they will expect to be compensated for their services.
As is the case with a family member or friend, a private fiduciary acting alone carries some human risk, making it critical to name a successor trustee or co-trustee.
Using an independent trust company
An independent trust company is a trust company that is not associated with a large bank. It performs the same function as a private fiduciary, but unlike naming an individual who may need to be replaced or succeeded, there is a built-in system to ensure reliability of service because of the trust company’s more robust infrastructure.
Many independent trust companies do not require that the trust assets be managed within their company, which many grantors like because they may already have an investment manager with expertise in managing the trust assets.
One drawback is related to cost — with greater resources, an independent trust company will likely charge more for its services.
Also, trust companies will often follow stricter procedures and may have greater bureaucracy, which may slow down the decision-making process related to trust distributions.
Engaging a corporate trustee
A corporate trust company, frequently a bank, can bring the greatest expanse of resources to the trustee role. Large trust companies may offer a range of services related to safeguarding and investing trusts, as well as providing tax, financial and estate planning services.
However, many large corporate trustee firms require that the grantor use one of their other services, such as custody or brokerage, in addition to providing a corporate trust officer. If the trust company has multiple business lines, there is potential to create misaligned incentives for trust officers. Not all trust companies are structured in the same way, so it is important to understand the incentive construct.
Even if incentives are aligned, a corporate trust company will likely charge more than the other possible trustee options because of the number of employees at the firm, the overhead and the additional service lines of business.
The selection of trustee(s) is an extremely personal decision and there is certainly no one-size-fits-all answer to the trustee selection question. While it is critical to find people who are trustworthy and financially astute, each grantor should make a decision that is aligned with their family’s financial circumstances and emotional sensitivities.
In some cases, it may make sense to appoint co-trustees, which can combine the benefits of ― or mitigate the less positive aspects ― of a certain type of trustee.
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