When working with clients to set up their estate plan, one of the most important, and sometimes challenging question we ask is “Who do you want to be your trustee?” The top answer is “Hmmm. That’s a good question. We haven’t thought about that.”
If you are like most of the clients we talk to about their estate planning for the first time, you may not have thought about who you would want to serve as trustee of your trust. It’s sometimes easier to figure out how to distribute your assets to your beneficiaries, but who you leave the responsibility of managing your estate and carrying out your wishes can be tough.
There is no universal right answer as to who should serve as a trustee of your trust. My goal here is to provide you with context, address frequently asked questions, and provide a framework of questions you may want to consider in making decisions about trustees.
First, let’s look at the role of a trustee.
The trustee of a trust is typically twofold: 1) the trustee is first responsible for administering your estate, generally meaning that they carry out your wishes and divide the estate between your beneficiaries as designated in your trust; and 2) if you wish to have assets managed on an ongoing basis through what is referred to as a testamentary trust, the trustee is responsible for managing and investing the trust assets and making determinations as to distributions given to beneficiaries.
Trustees are fiduciaries. In the case of a trust, a fiduciary is a person to whom property is entrusted for the benefit of another. Legally, trustees carry the highest legal burden placed upon them meaning that anyone or any entity serving as a fiduciary must do what they would have done for themselves.
In administering your estate, the trustee may have to work with the beneficiaries to solve disputes and concerns over the distribution of certain property. A trustee must be impartial in the interest of all beneficiaries.
In managing the trust assets, the trustee must manage and invest assets in a prudent and careful way with the goal of achieving asset growth. A trustee must keep a detailed accounting for all assets of the trust.
As I tell my clients, being handed the responsibility of being a trustee is not necessarily an honor. It is a big job!
Generally, any qualified person or entity can serve as trustee of your trust. Not helpful, right?
To narrow this down, many of our clients choose between three main groups: 1) friends and family, 2) trusted advisors, and 3) corporate trustees.
Let’s break down each group and list some pros and cons.
Family members and friends may be closer to the beneficiaries and may be more likely to understand the needs of the beneficiaries along with family dynamics. A friend or family member may generally still charge a reasonable trustee fee for serving in this role, but they usually do not charge an administrative fee.
Any friend or family member named should be decent with handling finances and be organized. A friend or family member may accidentally violate their fiduciary duty and be liable for substantial damages.
When talking through naming family members as trustees, I poke around to find out if there are any family dynamics that could cause rifts with any particular family member serving as trustee. I also advise against naming one sibling as trustee. If you want to see a family fall apart, put one sibling over the purse strings of the other siblings. It’s not pleasant. 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.
Attorneys, accountants and financial advisors often have unique relationships with their clients and may be suited to serve as trustee of a trust since they should understand you and your estate nearly as well as you do. However, advisors are busy and have other clients. It’s important to look at the advisor’s experience at serving as trustee and the time the advisor would be able to devote to administration of your trust. You may also want to consider the fee the advisor would charge and whether they carry insurance or a bond that would cover any breach of fiduciary suit that may be brought against them.
Banks and trust companies, what we generally call corporate trustees, provide professional fiduciary services as a part of their business. Corporate trustees are generally licensed under state banking regulations and carry insurance or bonds that cover breach of fiduciary duty actions brought against them. A corporate trustee must act independently and can reduce conflicts among family members.
Many corporate trustees have a track record of serving as trustee and investment of assets. All fiduciaries are held to the highest legal standard, but a corporate fiduciary may lose their ability to act as a corporate trustee for violation of state and federal regulations.
Corporate trustees typically have specific policies and procedures in how it administers trusts to ensure unbiased and professional services. They also are prepared to provide detailed accountings to beneficiaries monthly.
Corporate trustees work off fee schedules and typically charge around 1% of trust assets as the annual trustee fee.
(As a note, clients of Creative Planning do not need to worry about naming a trusted advisor at Creative Planning as their trustee as Creative Planning Trust Company, LLC is set up to serve the trust administration needs of our clients.)
If you have minor children, you may be tempted to put one person or couple in charge of the money and legal guardianship of your children. In some situations, this can be okay. However, be aware that while the guardian is taking care of the children while they are minors, they may be able to receive distributions from your trust to support the children. If the guardian is also the trustee, this means that they will make determinations as to distributions for support of the children and pay these distributions to themselves. This may cause concern. As discussed above, family members can accidentally breach a fiduciary duty, and this form of self-dealing is a common way this could occur
You can list more that one trustee as co-trustees of your trust. Sometimes, siblings are listed as co-trustees. Sometimes, you may list a family member along with a corporate trustee as co-trustee. Concerns with listing co-trustees are mainly relational (will the co-trustees manage the trust well together) and administrative (it can be a pain to have multiple trustees administering a trust).
Here are questions you may want to consider when choosing a trustee:
Can your trustee separate his or her personal feelings and interests from those of the beneficiaries and stay impartial at all times?
Does your trustee have an ability to analyze investments and a track record of successful investing?
Will there be temptation for your trustee to take undue risk in buying investments to generate a large return?
Will the trustee have adequate time to devote in serving as trustee?
Is there a potential risk of self-dealing by the trustee?
Is the trustee also serving as guardian of your children?
What experience does the person or entity have serving as a trustee?
If there is a breach of duty that results in loss of trust assets, will the trustee be able to satisfy a judgment or through their personal assets or insurance coverage?
Is the trust drafted so your beneficiaries can easily remove and appoint a new trustee if a chosen trustee mismanages the trust assets, rather than having to go through a judge?
What is the trustee fee charged by the trustee?
Will the corporate trustee invest the time to understand my family and their needs?
Will a corporate trustee’s administration and investment services be worth the fees the trustee charges the trust?
There is no universal right answer as to who should serve as a trustee of your trust. Going through the questions above and talking to your estate planning attorney about who may be best suited to serve as trustee can take the challenge out of making the decision and give you the peace of mind knowing you made the best choice for your situation.
Lea Bailes, J.D.
This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.