The selection of a trustee is one of the most important elements of trust design. This article looks at the different aspects of the role of the trustee and the factors you should consider when selecting one.
The person selected as trustee of a trust may shape your intentions for years — or even decades — to come. The trustee is responsible for keeping the trust’s financial blueprint on track in the face of random market events. He or she is also expected to ensure that the trust continues to meet its objectives for beneficiaries, even those whose goals and needs might evolve unpredictably over time. The ideal trustee will have — or be able to summon — legal, tax, investment, and administrative expertise, and deliver that expertise loyally, decisively, and impartially.
By its very nature, a trust must work best just when its creator cannot act. Your trust may be carefully designed to address all the concerns you can identify. But no matter how well you and your financial and legal advisors have analyzed potential contingencies, the best-laid plans could be derailed by unforeseen circumstances. And perhaps nowhere can a trust be more vulnerable than in its trustees.
Trustees may be at the fulcrum on the levers of change, striking a balance in the future that you might find unfathomable today. Trustees are expected to keep the trust’s financial blueprint on track in the face of random market events. They are also expected to ensure that the trust continues to meet its objectives for beneficiaries, even those beneficiaries whose goals and needs might evolve unpredictably over time. In addition, trustees themselves might be buffeted by the winds of fate. Individuals might someday choose to relocate or change their occupation. They might alter their lifestyles, retire, or otherwise become unable to fulfill the duties you have envisioned. Your attention to sound trustee selection principles and self-correcting design features now can help manage those future risks to your plans.
The Ideal Trustee May Be a Jack or Jill of Many Trades
The role of trustee may at any given time require legal, tax, investment, and administrative expertise, as well as the wisdom to invoke that expertise when needed. The ideal trustee should also be able to deliver that expertise loyally, decisively, and impartially.
As the creator of the trust, you have the broadest possible discretion in selecting someone to act as trustee. You can opt for a personal confidant or relative in whom you have strong faith, such as a business associate, sibling, or spouse. You can select a professional practitioner whose skills might be especially useful to your purposes, such as a lawyer or accountant. Or you can designate a bank or trust company to act as a corporate trustee. Each option presents a unique balance of benefits and concerns.
Personal or Professional — Weighing the Differences
A personal confidant or relative may already have a well-established relationship with your intended beneficiaries and a detailed knowledge of the unique circumstances in your bequest. That familiarity can provide the context needed to interpret your wishes in your absence most effectively. It can also lay the groundwork for a strong long-term relationship between the trustee and the beneficiaries. However, someone chosen solely on the strength of personal relationships and intimate knowledge may lack the training or skills needed to act impartially in the face of duress or emotional entanglement. What’s more, a friend or relative acting as a trustee might have a conflict of interest or be unable to devote sufficient time to the duties of trusteeship, and these potential deficiencies may not become readily apparent for some time.
A professional practitioner who has had significant involvement in your family’s affairs may offer many of the same advantages as a personal associate, such as personal relationships with beneficiaries and historical knowledge of unusual situations and special needs. They may also have the professional distance needed to remain dispassionate under difficult circumstances. However, like a lay trustee, an individual professional’s tenure may be subject to the vicissitudes of his or her life and may ultimately be unavailable at some critical future juncture.
The Advantages of a Corporate Trustee
A bank acting as a corporate trustee can provide a high level of impartiality and detachment as well as ready access to specialized technical, tax, and legal expertise. A corporate trustee can also offer a high level of continuity and stability, since its ability to serve is generally not dependent upon any single individual. However, a bank cannot maintain the same level of intimate knowledge as a family insider about your intentions or your beneficiaries’ needs.
You should keep in mind that different types of trustees may be subject to different rules, insurance, and licensing requirements. Lawyers, for example, must meet the terms of their state bar association licenses when they act as trustees. Banks may be subject to regulatory audits and documentation procedures. Also, professional trustees are often held to the highest fiduciary standards under the “prudent investor” principle. Simply put, that means that trust assets would have to be managed according to the best practices of the asset management profession, with special attention to appropriate risk management and diversification.
Trusts created in the Colonial era still function today, even as the laws governing trust and inheritance change almost daily. Whether your goal is ensuring your family’s fiscal stability or creating a permanent legacy, a properly crafted trust can be a powerful tool.
The Costs of Trustees
|Each trust involves many unique considerations, so broad generalizations about annual fees and one-time costs may not be meaningful in relation to any specific trustee arrangement. The basic yearly trustee fee may be expressed as a percentage of the assets in the trust. Each state has its own rules governing the maximum fee that a trustee can charge and the precise range of services that the fee might cover. In addition, many legal, accounting, custody, and investment management fees may sometimes be billed separately, even if the individual or organization serving as trustee also performs those services.|
Points to Remember
- The ultimate success of your trust’s mission will depend in large part on how your trustee carries out your intentions, making the selection of a trustee one of the most important elements of trust design.
- The ideal trustee should possess or have ready access to legal, tax, investment, and administrative expertise, as well as the wisdom to invoke that expertise when needed. The ideal trustee should also be able to deliver that expertise loyally, decisively, and impartially.
- Personal confidants, relatives, lawyers, accountants, and banks are all commonly used as trustees. Family members, friends, and business associates are often the most knowledgeable about your intentions and your beneficiaries’ needs, but may have less than optimal skills or temperament for the job. Professionals may offer a stronger skill set but can lack important personal connections to your family. Professionals may also be held to a higher standard of performance than lay trustees by probate judges and executors.
© 2012 McGraw-Hill Financial Communications. All rights reserved.
April 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by D3 Financial Counselors, a local member of FPA.