Choosing the right trustee is one of the most crucial decisions when creating a trust. A trustee is responsible for managing assets, making financial decisions, and ensuring the trust's terms are carried out. Selecting the wrong trustee can lead to mismanagement, conflicts, and even legal disputes.
If you're establishing a trust, whether it's a revocable trust, irrevocable trust, or special needs trust, it's essential to select a trustee who is reliable, financially responsible, and capable of handling complex legal duties.
In this guide, we'll cover:
- What a trustee does
- Types of trustees
- Key factors in selecting a trustee
- Professional trustees vs. individual trustees
- Common mistakes to avoid
For personalized legal assistance in trust planning, contact us using our online form or call 414-253-8500.
What Does a Trustee Do?
A trustee is a fiduciary, meaning they are legally obligated to act in the best interest of the beneficiaries. Their duties vary depending on the type of trust but generally include:
- Managing Trust Assets: Investing funds wisely and protecting the trust's assets.
- Distributing Assets to Beneficiaries: Ensuring assets are allocated according to the trust's terms.
- Handling Taxes and Accounting: Filing tax returns, keeping financial records, and reporting to beneficiaries.
- Making Discretionary Decisions: If the trust allows for discretion, the trustee must decide when and how beneficiaries receive funds.
- Avoiding Conflicts of Interest: Trustees must act impartially and in accordance with the trust document.
Selecting the right trustee is critical because mismanagement can lead to financial losses, legal battles, and unintended consequences for beneficiaries.
Types of Trustees
There are several types of trustees, each with different roles and responsibilities. Understanding these options can help in making the right decision:
1. Individual Trustee
A family member, friend, or trusted advisor can serve as an individual trustee. This is common for family trusts and allows for a more personalized approach.
Pros:
- Lower costs (no professional fees).
- A personal connection to beneficiaries.
- More flexibility in decision-making.
Cons:
- May lack financial and legal expertise.
- Risk of favoritism or conflicts of interest.
- May become incapacitated or pass away.
2. Corporate Trustee
A bank, trust company, or financial institution can act as a professional trustee.
Pros:
- Professional management of assets.
- No personal bias or conflicts.
- Continuity-will not become incapacitated or pass away.
Cons:
- Higher fees.
- Less personal attention to beneficiaries.
- May have strict administrative policies.
3. Co-Trustees
Some people appoint two or more trustees to share responsibilities.
Pros:
- Balance of personal knowledge and professional expertise.
- More oversight, reducing the risk of mismanagement.
Cons:
- Potential for disagreements between trustees.
- Decision-making can be slower and more complex.
4. Successor Trustee
A backup trustee named in the trust document, in case the original trustee is unable or unwilling to serve.
Pros:
- Ensures continuity of trust management.
- Allows for flexibility in case of unforeseen circumstances.
Cons:
- Successor trustees may not have immediate familiarity with the trust.
Comparing Individual and Professional Trustees
| Feature | Individual Trustee | Professional Trustee (Bank, Trust Company) |
|---|---|---|
|
Expertise |
May lack financial and legal expertise |
Experienced in trust and financial management |
|
Cost |
Typically no fee or minimal costs |
Charges professional fees |
|
Personal Connection |
Strong personal relationship with beneficiaries |
Impersonal, follows standard procedures |
|
Potential for Conflict |
Possible family disputes or favoritism |
Neutral third party, less risk of bias |
|
Longevity |
May become incapacitated or pass away |
Continuous service, institution-backed stability |
|
Decision-Making Speed |
Faster, more flexible |
Slower due to institutional policies |
|
Legal and Tax Compliance |
May require assistance from professionals |
Familiar with laws, tax regulations, and reporting |
Key Factors to Consider When Choosing a Trustee
When selecting a trustee, consider these important factors:
1. Financial Knowledge
A trustee doesn't need to be a financial expert, but they should be capable of handling investments, paying bills, and filing taxes. If they lack experience, they should be willing to work with financial advisors.
2. Trustworthiness and Integrity
Since trustees control assets and make decisions on behalf of beneficiaries, they must act ethically and responsibly at all times.
3. Understanding of Beneficiaries' Needs
A good trustee should have a sense of responsibility toward the beneficiaries and understand their unique financial, medical, and emotional needs.
4. Availability and Commitment
Being a trustee is a long-term commitment. Some trusts last for decades or even generations, so it's crucial to choose someone who is available and willing to fulfill the role.
5. Legal and Administrative Capabilities
Trustees must comply with state laws, tax requirements, and the trust's legal terms. An individual trustee may need legal guidance from an attorney to avoid making mistakes.
Professional Trustee vs. Individual Trustee: Which Is Right for You?
Choosing between an individual trustee (such as a family member) and a professional trustee (such as a bank or trust company) is one of the most significant decisions when setting up a trust. Both options have advantages and disadvantages, depending on your priorities.
When to Choose an Individual Trustee
An individual trustee, such as a trusted family member or close friend, may be a good choice if:
- You want someone who understands family dynamics and the beneficiaries' unique needs.
- Your trust does not involve complex financial assets or extensive tax obligations.
- You prefer a more personal approach in administering the trust.
- You want to minimize costs, as individual trustees typically do not charge fees.
However, an individual trustee may not be the best choice if:
- They lack the financial or legal knowledge needed to manage the trust properly.
- There is potential for family conflicts or disputes among beneficiaries.
- They are unable to dedicate the necessary time and effort to managing the trust.
When to Choose a Professional Trustee
A corporate trustee, such as a bank, trust company, or law firm, may be a better choice if:
- Your trust holds significant financial assets, investments, or real estate that require professional management.
- You want to ensure long-term stability and continuity in trust administration.
- Your beneficiaries may have special needs or require structured financial oversight.
- You prefer to avoid potential family conflicts by having a neutral third party manage the trust.
However, professional trustees may:
- Charge higher fees for their services.
- Be less flexible in making discretionary decisions for beneficiaries.
- Lack the personal connection to beneficiaries that a family member might have.
Combining Both: The Co-Trustee Approach
To balance the advantages of both individual and professional trustees, many people choose to appoint co-trustees. This approach allows:
- A family member or trusted individual to handle personal matters, while
- A corporate trustee manages financial and legal responsibilities.
This hybrid model reduces the risk of mismanagement while maintaining a personal connection with the beneficiaries.
Common Mistakes to Avoid When Choosing a Trustee
Selecting the wrong trustee can jeopardize the administration of your trust and create unnecessary complications. Here are some common mistakes to avoid:
1. Choosing Based Solely on Family Ties
Many people default to naming a spouse, child, or sibling as trustee without considering whether they are the best fit for the role. Family members may not have the time, skills, or temperament to handle trust administration effectively.
2. Failing to Name a Successor Trustee
If your primary trustee is unable to serve due to illness, death, or incapacity, your trust could end up in legal limbo. Always name at least one successor trustee in your trust documents.
3. Not Considering Professional Assistance
Even if you choose an individual trustee, they may benefit from working with a trust attorney, financial advisor, or tax professional to manage the trust properly.
4. Ignoring Potential Conflicts of Interest
If a trustee has personal relationships or financial conflicts with beneficiaries, disputes may arise. This is especially important in blended families or situations where beneficiaries have unequal distributions.
5. Selecting a Trustee Without Discussing It With Them
Before finalizing your decision, talk to the potential trustee to ensure they understand the responsibilities and are willing to serve. Some individuals may decline due to the time commitment or complexity of the role.
How to Appoint a Trustee in Your Trust
Once you've decided who will serve as trustee, you need to legally document your choice in your trust agreement. The steps include:
- Drafting a Trust Document - Work with an estate planning attorney to create a comprehensive trust agreement.
- Naming Your Trustee and Successor Trustee - Clearly list the primary trustee and at least one backup trustee.
- Specifying Trustee Powers - Outline what decisions and responsibilities the trustee has, including asset management, distributions, and tax filings.
- Adding Compensation Terms (If Applicable) - If using a corporate trustee, specify their fee structure in the trust agreement.
- Providing Instructions for Beneficiaries - Detail how assets should be distributed and any conditions for disbursements.
For assistance with setting up a trust or appointing a trustee, contact Heritage Law Office at 414-253-8500.
Contact an Estate Planning Attorney for Help Selecting a Trustee
Selecting the right trustee is a critical decision that affects the long-term success of your trust and the well-being of your beneficiaries. Whether you need guidance on choosing a trustee, setting up a trust, or managing trust administration, an experienced estate planning attorney can help.
At Heritage Law Office, we assist clients in structuring trusts that protect their assets, minimize taxes, and ensure smooth administration. Contact us today at 414-253-8500 or use our online form to schedule a consultation.
Frequently Asked Questions (FAQs)
1. What qualities should I look for in a trustee?
When selecting a trustee, consider qualities such as financial responsibility, honesty, reliability, and strong decision-making skills. The trustee should be able to manage assets wisely, follow legal requirements, and act in the best interests of the beneficiaries. If the trust involves complex investments or tax considerations, financial or legal expertise is also beneficial.
2. Can a trustee also be a beneficiary of the trust?
Yes, a trustee can also be a beneficiary of the trust, but this can create potential conflicts of interest. If a trustee has discretion over distributions, other beneficiaries may question whether the trustee is acting fairly. To avoid disputes, you may consider appointing co-trustees or providing clear distribution guidelines in the trust document.
3. What happens if a trustee is unable or unwilling to serve?
If a trustee is unable or unwilling to serve, the successor trustee named in the trust document will step in. If no successor trustee is listed, the court may appoint a new trustee. This is why it is important to name at least one backup trustee when setting up a trust.
4. Do trustees get paid for their services?
Yes, trustees are typically entitled to reasonable compensation for their work. If an individual trustee is serving as a family member, they may choose to waive their fee. However, professional trustees, such as banks or trust companies, charge management fees, which vary based on the complexity and value of the trust.
5. Can I change my trustee after the trust is created?
It depends on the type of trust. If you have a revocable trust, you can change the trustee at any time. However, if the trust is irrevocable, modifying the trustee requires court approval or agreement from beneficiaries, unless the trust document includes provisions allowing for trustee replacement.