When establishing a trust, choosing a trustee is one of the most important decisions you will make. The trustee will have control over the assets of the trust and will control the distribution of these assets to the beneficiaries. Depending upon the size and type of trust being created, as well as the purpose of the trust, there are different considerations in selecting the trustee.
Options for Choosing a Trustee
Most people pick an individual they know well as a trustee, such as a family member, friend, or professional advisor. However, a corporate trustee such as a bank or trust company may also be named alone or with an individual as co-trustees.
Friends and Family as Trustees
Frequently, when creating a trust, individuals prefer to name friends or family as trustees, usually because of the level of trust that is required. Friends and family might also choose to serve as trustees for free, and not take a fee or commission (though they are still entitled to do so in accordance with the rules in the relevant jurisdiction). An important thing to consider when appointing a friend or family member as trustee is how this may affect the pre-existing relationship. Trustees and beneficiaries might disagree about the management of the trust assets or distributions, and this can lead to resentment or damage the relationship.
Lawyer or Accountant as Trustee
Another common choice for a trustee is the individual’s lawyer or accountant. These professionals are someone the person trusts but there isn’t a personal relationship that could be affected as with choosing a family member or friend. An attorney or accountant is independent like an institutional trustee. However, they may be more flexible in dealing with the beneficiaries because they are not subject to a rigid institutional structure. Further, they may be less expensive than an institutional trustee, usually charging by the hour rather than based on the amount that is held in trust.
Institutional Trustee
In some cases, an institutional trustee like a trust company or bank may be best. They offer several benefits, including their structure, oversight, and experience in trust administration. They tend to be used when there are concerns about a beneficiary, the beneficiaries do not get along, or when the trust is sizable.
The downside of selecting institutional trustees is that they may be inflexible on distributions if they fear it will reduce their assets under management. Further, it can be more difficult to remove an institutional trustee than an individual trustee. One way to address these concerns is to consider naming a third-party trust protector who is neither a fiduciary nor a beneficiary but is empowered to remove and replace the trustee.
Role of the Trustee
A trustee is legally bound to manage the trust in accordance with the terms of the trust document and to always act in the best interests of the trust and all the beneficiaries. The fiduciary responsibilities of a trustee can be diverse, including recordkeeping, administrative duties, investment management, and communication with beneficiaries, to name a few.
When choosing a trustee, you should ensure that the trustee you select is prepared to spend time managing the trust account, making financial decisions, monitoring financial advisors, and ensuring the preparation of tax returns, or hiring qualified experts to assist. In addition, the trustee must be able to keep accurate records of the trust finances and holdings and all transactions and provide a full and complete accounting upon the request of a beneficiary or if ordered by a court.
The scope of the trustee’s powers can vary. Depending on the terms of the specific trust, the trustee might have total control over the trust assets and any distributions or might have very little discretion. The amount of discretion to grant to a trustee is something that should be considered when drafting the trust.
Co-Trustees
A solution to some of the limitations of a particular type of trustee discussed above is to consider co-trustees. For instance, you can name both your sister and a professional trust company as co-trustees. Your sister will be most familiar with the family dynamics, but the trust company can handle the trust administration and make the tough calls when needed. As with considering the scope of discretion to allow trustees, another consideration in the case of co-trustees is whether they can act alone or if certain actions require unanimous agreement.
Removal of a Trustee
Another method of allowing flexibility in your trust is to give someone else, such as your spouse or trust protectors, the ability to remove and replace the trustee. You also may be able to remove and replace the trustee during your lifetime. There are many reasons why you might wish to include this removal power, and you should discuss this when drafting your trust, as these provisions must be included in the trust document.
An experienced attorney can help you understand your options and address concerns when choosing a trustee. Contact our firm to learn how we can assist you in creating or updating your estate plan to meet your needs and goals.
