Choosing Your Captain: What to Look for in a Trustee
JonPaul McBride, CFP®
Trusts are an effective estate-planning tool used to protect assets and transfer wealth, both to family members and for charitable causes. They offer privacy, continuity, and control, and provide prudent management when transferring your assets directly would be ill-advised. However, a trust without the proper trustee is like a ship without a captain.
A captain is obligated to three separate, and sometimes conflicting, parties: the ship’s owner, the ship’s passengers and contents, and the laws of the sea. Similarly, a trustee must heed the wishes of the trust’s creator as written in the trust itself, must balance the needs of the current and future beneficiaries, and must follow federal and state laws.
The trust document spells out the trustees’ powers. Nevertheless, a trust cannot delineate every possible scenario the trustees or beneficiaries may encounter. Once the trust instrument is signed, the trustees guide the trust not only by looking to the trust provisions (the ground rules of a trust) but also by considering the donor’s intent and any letters of instructions. For these reasons, it’s key to choose a person or team in whom you have the utmost confidence to deftly guide your ship.
The Role of a Trustee
Trustees serve as fiduciaries, meaning they are legally bound to act in the best interest of both current and future beneficiaries. This is not a responsibility to be taken lightly, as trustees are personally liable for their actions. Trustees oversee the property held by the trust which may include prudently investing liquid assets and managing businesses or real estate. They are also responsible for filing tax returns and distributing payments to beneficiaries. It’s a full time job, so whomever you pick should understand the commitment involved.
To illustrate the interplay, imagine Patricia, now deceased, funding a trust for her husband Bob’s benefit during his lifetime. That trust then splits into equal trusts for the benefit of their two children, Randy and Tim, upon Bob’s death. A good trustee will keep in regular contact with Bob to make distributions and invest the trust, taking his current needs into consideration. He also must form a working relationship with Randy and Tim as the eventual beneficiaries and make sure Bob does not use up all the trust assets. It is a delicate balance.
Types of Trustees
When you are ready to establish a trust you’ll have to choose between a professional or individual trustee. The best choice depends on your goals for the transferred property and your beneficiaries.
Professional trustees can be financial institutions, like a bank, or advisors with significant experience serving as trustees (e.g. a trust and estate attorney). These trustees have the resources and technical “know how” to properly administer trusts. Generally, they can also serve through several generations of a family by providing continuity, operational knowledge and consistency, and independence from the family. On the downside, they can be less familiar with the personal needs of your family and, thus, less flexible when making distribution decisions.
Individual trustees can be family members or trusted friends. Donors often choose family trustees with whom they have a strong, longstanding relationship and confidence in their intentions. Unlike a professional trustee, family trustees might not always have immediate access to the resources they need and may need to engage investment advisors and other professionals to fulfill their fiduciary duties.
It’s common for donors to choose a blend of family and professional trustees especially if the trust requires an independent trustee at all times. To continue the example above, Patricia could choose her son Randy to serve as a family trustee while also appointing her estate planning attorney for professional guidance as the independent trustee. Trustees may resign at some point, so when you choose your captain, you should use those same criteria for your “first mate” or successor trustee. You also can allow your beneficiaries to name successor trustees.
Before Making Your Decision…
There are a few simple questions that every grantor should ask before naming a trustee.
- How long will the trust last?
Until recently, state laws limited how long a trust could last. Many states have eliminated these rules, so trusts can last for generations. Your time horizon might dictate the kind of trustee you use and the mechanism for replacing trustees as beneficiaries’ lives change in the future. Ultimately, you want to name a trustee who has the ability and commitment to see the trust meet its intended purpose.
- What are the trustee’s fees?
Trustees are entitled to reasonable fees for their services. Professional trustees will have fee schedules you can compare. The complexity of the trust’s assets and its distribution provisions and accounting requirements will determine the amount of fees.
- What will my beneficiaries need?
A trust is your legacy so choose a trustee that can navigate the dynamics in your family. Your trustee should be longsighted, prudent, and agile enough to respond to your beneficiaries’ needs promptly over the course of their lives.
Choosing a trustee to steer your ship requires careful deliberation. Naming a trustee who is knowledgeable, reliable, and evenhanded will help ensure that your goals are achieved and that your heirs are cared for as intended.