Selecting a trustee is one of the most critical decisions in estate planning. Usually, when a grantor (sometimes called a trustor or settlor) is establishing a living trust, they have a general idea who they want to leave their assets to, but when it comes to selecting the person (or entity) who will be responsible for managing and distributing their assets, there may not be an obvious choice. The grantor of a revocable living trust usually acts as their own trustee during their lifetime. Upon death or in the event of incapacity, a successor trustee will take over for the grantor as trustee.
A trustee must be someone you can trust completely. It can be an individual such as family member or a trusted friend. Family dynamics often play an important role in the selection process. However, a successor trustee does not have to be a relative, and a family member may not always be the best choice.
What is a Trustee?
A trustee is a trusted individual or entity who has a fiduciary duty or legal obligation to act in your best interests and those of the beneficiaries. A trustee must put aside their own interests, beliefs, or biases. A trustee holds and manages property or assets for another person, and this job comes with a lot of responsibility. Most trust documents allow a trustee to hire professionals to assist them in their duties, therefore, your trustee does not necessarily need to have any specialized skills, legal, accounting, or financial knowledge.
Generally, trustees are entitled to be paid for their work. The amount and structure of payment can vary widely. Payment may be specified in a trust document as a flat fee, hourly rate, or a percentage of trust assets. If the trust document does not specify an amount, state law provides that the amount of compensation is “reasonable” based on the complexity of the trust, the amount of work involved, and other factors. Professional trustees such as banks or attorneys almost always charge a fee. In addition, you can choose more than one trustee to manage your trust. Choosing co-trustees to manage your trust may also be problematic because unless the trust document states otherwise, co-trustees usually have to agree before making a decision on behalf of the grantor or a beneficiary.
With so many options, how should you choose the best person or entity to manage your trust and ensure that the instructions you provided in your estate plan are properly carried out?
A good approach for choosing a trustee is to focus on the best candidate for the job. Finding the best candidate usually includes having a clear understanding of the work that needs to be done along with the powers and responsibilities you will be granting to a trustee. Next, consider the size and scope of the job, and then evaluate the qualities best suited for the individual or entity who will perform the work.
Understanding the Job
Trustees are fiduciaries, which means they are legally bound to act in the best interest of the trust’s beneficiaries. A trustee’s responsibilities include:
- Managing assets: Trustees oversee investments, property, and other assets within the trust.
- Distributing assets: They ensure beneficiaries receive their distributions as outlined in the trust documents.
- Maintaining records: Trustees must keep detailed financial and administrative records.
- Filing taxes: Trustees are responsible for filing and paying taxes on behalf of the trust.
A trustee must be impartial and treat all beneficiaries fairly unless otherwise specified in the trust. Good questions to ask yourself when considering a family member as your trustee are whether the trustee is capable, has time, and can act impartially. This is especially important if your trustee is also a beneficiary of the trust.
Consider the Scope of the Job
Because your trustee’s main job will be to manage and hold your assets for your benefit (while you are alive) then for the benefit of your beneficiaries (when you pass), ask yourself what it takes to manage your real and personal property, pay your bills and taxes, manage your insurance, investments, retirement accounts, etc. Your trustee will step into your financial shoes when you are either no longer able to manage your financial life due to incapacity, your death, or because you are either no longer physically capable. Depending on the scope of the job, managing your financial life may be a big or relatively small job.
If the complexity of financial affairs is vast, even the most capable individual may not be the best candidate due to lack of time and therefore a professional trust company which includes investment and accounting professionals dedicated to the job may be the best choice. Administering a trust can be complicated and time-consuming for the trustee. You will do yourself and your beneficiaries a disservice by selecting someone who isn’t up to the challenge or may simply not have the time.
Factors to Consider When Choosing a Trustee
Overall, you want a trustee who is organized, wise, patient, and honest. In addition, you will want to choose a trustee who effectively manages their own affairs and has time to manage yours. It’s best to think about not only who can handle the responsibility but also who has the time.
You will also want to consider the age of your trustee and how long the trust will need to be managed for the benefit of your beneficiaries. When the appointed trustee is an individual, it is wise to designate a successor trustee. Should something happened to the individual acting as your trustee (such as death, incompetence, or simply unwillingness to continue acting as a trustee), you will have an alternate who can step in. If a successor trustee or alternate is not named in the trust document, then the beneficiaries will generally have to petition the court to appoint a successor trustee. The trustee appointed by the court may not be the same person you would have preferred. Consequently, it’s best to save time, court and attorney fees, and either specifically designate a successor trustee or alternate, or at least, give guidance on how to pick a successor trustee.
Choosing the right trustee requires careful consideration of several factors:
1. Integrity and Trustworthiness
The trustee must have a strong moral compass and be someone you deeply trust. They should prioritize the beneficiaries’ interests above their own.
2. Financial Acumen
A trustee should have experience managing investments and making prudent financial decisions. This is particularly important if your trust contains complex assets or long-term goals.
3. Impartiality
The trustee must be able to act without favoritism, especially if the trust has multiple beneficiaries. Personal relationships should not interfere with their duties.
4. Accountability
Trustees must maintain impeccable records and be transparent with beneficiaries about their decisions and actions.
5. Communication Skills
Effective communication is essential for keeping beneficiaries informed and managing relationships with advisors or co-trustees.
6. Experience
Depending on the complexity and scope of your financial life, an ideal trustee may require knowledge of trust law, tax requirements, and experience managing trusts. Professional trustees often bring specialized expertise in these areas.
7. Availability
Trustees must have adequate time to devote to their responsibilities, especially for trusts requiring ongoing management over many years.
Individual vs. Professional Trustees
You can choose between appointing an individual (such as a family member or friend) or a professional trustee (such as a bank, trust company, or law firm). Each option has advantages and disadvantages:
An individual trustee comes with a personal connection and understanding of family dynamics which comes with a potential for bias, lack of understanding, and time constraints. A professional trustee lacks familiarity and a personal connection but provides expertise and impartiality but comes with higher fees.
Dual Trustee Approach
For complex trusts, you can appoint both an individual and professional trustee as co-trustees. This arrangement combines personal understanding with professional expertise, ensuring balanced decision-making and continuity in management.
Questions to Ask Before Choosing a Trustee
- Does the trustee have the necessary financial expertise?
- Can they remain impartial under challenging circumstances?
- Are they willing to devote time and effort to fulfill their duties?
- Do they understand the unique needs of your family or beneficiaries?
Conclusion
Choosing a trustee is not just about technical qualifications, it’s about finding someone who aligns with your values, understands your goals, and can effectively manage the trust’s assets. Whether you opt for an individual, professional, or dual approach, careful evaluation is essential to ensure your trust operates smoothly for years to come.
