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Articles

Does It Matter Who I Choose For My Trustee?

By Toni Puopolo Brogna, CTFA, CIS II on September 2, 2020
Choosing the right trustee to serve now or on trusts that may be created in the future is extremely important. In fact, choosing the right trustee may be one of the most important decisions you will make in your estate plan. The following details the trustee’s responsibilities and discusses the pros and cons of different types of trustee.

Trustee Responsibilities

A trustee, as the name implies, is someone who can be trusted to manage and administer the trust in an impartial way. The ideal trustee should be someone in whom you have the confidence to make decisions based on the directives you have spelled out in the trust document. Also important is that, after your death, the trustee should be someone who will make decisions the way you would have made such decisions had you been alive to make them: for the benefit of your spouse, family member, or, in some cases, a friend.

The best trustee has a combination of good interpersonal skills and solid technical skills with proficiency and awareness of the duties required. Consider also the type of trust to be administered. Is it a revocable trust, an irrevocable trust, a marital trust, a special needs trust, or something else? Is it a creditor protection trust that would require an independent trustee? Understanding the nature and complexity of the trust is crucial, as is understanding the tax implications on a given type of trust.

Administratively, the trustee has a duty to report--which means they are responsible for generating statements and sending annual accountings to all beneficiaries. They must maintain detailed records, process transactions, and make sure that fiduciary income tax returns are prepared for the trust.

Trustees have a duty of loyalty. Making objective and unbiased decisions when dealing with beneficiaries who may have different and/or conflicting interests is critical. Therefore, knowing and understanding the family dynamics is helpful.

Trustees also have a duty to preserve trust assets and are responsible to make sure the trust account is productive. Therefore, they need to have some familiarity with basic investment concepts so that they make prudent investment decisions. If they lack investment know-how, they should know to hire an investment advisor who can guide them in sensible investment choices.

Three Types of Trustees

Given the nature of their responsbilities, who can you confidently choose to serve as trustee? Generally, there are three types of trustees: (1) an individual trustee who is, oftentimes, a family member or close friend; (2) a professional trustee; and (3) a corporate trustee. There are advantages and disadvantages to each.

Family Member as Trustee
When thinking about whom to choose as trustee, most people start by considering close friends and family members. Clearly, this group is the most familiar with you and your family, and they will understand your family’s dynamics. But, are they really the best choice?

People often think an advantage of having a family member or close friend serve as trustee is the belief that a family member will waive trustee fees. But that can be a double-edged sword: serving as a trustee can be a lot of work. A family member who shoulders all the responsibilities of overseeing the administration of a trust and monitoring trust assets can easily become resentful if they are not receiving a fee. In cases where the beneficiaries are contentious or ungrateful, the trustee will resent putting in all the work for no recognition and no fee. On the other hand, the beneficiaries – not grasping all the work required of a trustee - may resent a family member getting paid from “their” trust assets if the trustee does take a fee. This can become an extremely uncomfortable situation and can damage familial relationships.

Another potential disadvantage to a family member as trustee is that is that they may be too close to the family and may get caught up in the drama. Or they may make emotional decisions because they are too close to the situation. In both cases, it may be better to choose someone with a little more distance who can remain impartial. Do not underestimate the possibility of drama during the distribution of your assets. It is amazing how old jealousies and resentments can emerge, along with feelings of entitlement toward assets which you are perceiving as a gift or windfall for your heirs.

Professional Trustees
In most situations, your family may be better served by a professional trustee. Professional trustees bring expertise, structure and oversight. They often have the resources in-house to handle the entire administration process. Finally, professional trustees are better suited to make the tough decisions and tell beneficiaries “no” when appropriate and can remain impartial when beneficiaries do not get along.

You will pay for this service, but, in many instances, it will be money well spent. We have seen that, more often than not, a professional trustee can actually save you money. An individual trustee may lack the technical skills required and may need to hire investment advisors, tax preparers, and/or attorneys to help guide the process. All these expenses are paid from the trust, thereby depleting some of the principal.

One concern with professional trustees is that they do not know the family well enough. While it may take time to develop a successful trustee relationship, professionals are accustomed to this role and are quickly able to grasp the nuances. Once the trustee relationship has developed, there is consistency in how the family members are treated. This aspect takes a professional trustee relationship beyond what a corporate trustee may be able to offer.

Corporate Trustees
This brings us to the third option: the corporate trustee. The corporate trustee is usually a bank or trust company. The relationship here is not with an individual, but with the trust company or bank itself. They offer the same impartiality as a professional trustee, and, certainly, the knowledge and depth of resources.

The main drawback to a corporate trustee is that banks and trust companies may be hard to remove as trustees and are often inflexible. They also tend to be tightfisted in making distributions. Further, having a corporate trustee may slow the distribution process as most requests need to go through a committee. Frequently, a Trust Advisor or Trust Protector must step in to advise.

Conclusion

All three types of trustees are viable options and, depending on the trust and situation, one type might be a better choice than the other. But what if you cannot decide which is better for you or your family? Well, you do not necessarily have to limit yourself to one or the other.
First, consider co-trustees. Why not name your sibling/cousin, or other family member or close friend as the individual trustee, along with a professional trustee? Your family member will be most familiar with the family dynamics, but the professional trustee can handle all the trust administration and make the tough calls when needed. Having one trustee who is more emotionally involved can work well when balanced by an independent professional trustee who has the technical resources, is emotionally removed, and can remain impartial enough to make objective decisions.

Second, or maybe this should be first, talk to your lawyer and other advisors and discuss your specific situation, the type of trust you need, what you need it for, and all your concerns. Their experience can help guide you to make the right decision for you and your family.

©2020. This material is intended to offer general information to clients and potential clients of the firm, which information is current to the best of our knowledge on the date indicated below. The information is general and should not be treated as specific legal advice applicable to a particular situation. Fletcher Tilton PC assumes no responsibility for any individual’s reliance on the information disseminated unless, of course, that reliance is as a result of the firm’s specific recommendation made to a client as part of our representation of the client. Please note that changes in the law occur and that information contained herein may need to be reverified from time to time to ensure it is still current. This information was last updated August 2020.

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