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A Measured Approach To Selecting The Right Trustee(s)

A trust is often only as good as the person selected to manage it. It may a daunting process, but selecting the right trustee and having fail-safes in place are crucial to ensuring the complexities of a trust are handled appropriately.

Here are some of the pros and cons of choosing different trustees.

Advantages of Relative Trustees

Safeguards Against Trustee Disasters

  • Make sure that all documents are drafted by an attorney who specializes in trusts.
  • Request regular accounting reports.
  • Ask that an annual or quarterly trust report be made to beneficiaries.
  • Bond the trustee (you may receive restitution from the bonding company if a bonded trustee steals from the trust).
  • Employ an independent trust protector to mediate beneficiary and trustee discussions

Many experts agree that a relative is a logical trustee choice for trusts designed to transfer wealth within the family. When underage children are involved, it's important to select a trustee that is familiar with the needs and circumstances of the family. You want the trustee to do his or her best to ensure the current lifestyle of the children is maintained, but someone who doesn't have a conflict of interest from being the actual caregiver of the children.

Likewise, most experts agree that relatives are logical trustee choices for a trust that's mostly comprised of real estate, business assets, or an asset that would otherwise need ongoing maintenance. In fact, most corporate fiduciaries will not get involved in such a situation due to the liability.

It's vital to select a trustee who has a good knowledge of financial matters and the business world, as well as a person who possesses the skills necessary to be a trustee.

Potential Downside of Relative Trustees

One of the most common mistakes individuals make is assuming that trustworthiness equates to capability. Selecting a trustworthy family member doesn't guarantee that the complex requirements of the trust will be fulfilled, especially if the trustee is a novice on financial matters.

Even if the family trustee is knowledgeable, there may still be a downside to selecting a family member from a complicated family dynamic. The positive aspect of the familiarity that a relative has with the needs and circumstances of the family might also be a negative if there are hard feelings or biases involved.

Being a trustee isn't like asking someone to water your plants. It's a job that comes with tremendous responsibility and time consumption. Most experts recommend compensating any trustee, family or not, equivalent to at least one percent of the value of the trust.

Advantages of Professional Trustees

Professional trustees can be a trusted objective professional, attorney, a financial adviser, bank, or independent trust corporation. Some people even opt to use various entities as co-trustees to ensure against competing interests from forming. Aside from absent familial strife, institutional trustees also usually have a broader range of fiscal expertise and more time to manage the trust than relatives.

Potential Downside of Professional Trustees

Of course, the above entities may not have familiarity with the beneficiaries. A trust essentially determines how distributions to beneficiaries are issued and generally allows for certain factors, such as medical or education needs. A professional trustee might not know that a beneficiary asking for additional distributions has a substance abuse problem. Likewise, additional distribution requests for legitimate purposes could also be overlooked, dealt with impersonally, or have a long approval process.

Another downside is the expense. Professional trustees usually earn a percentage of whatever the value of the trust is and fees for services rendered.

Why Select One or the Other?

Sometimes the downside of professional and relative trustees can be diminished by selecting both to serve as co-trustees. Some also use this type of co-trustee arrangement for tax and estate law reasons.

All trustee candidates should be carefully vetted. As far as professional trustees go, consult with your attorney or personal accountant. Carefully assess the knowledge, experience, qualifications, resources, and fees of candidates before making a decision.

Remember that life can change on a dime. The selected trustee may be a relative by marriage, die, or be too sick to attend their duties. Circumstances such as these should be allowed for; for example, trusteeship can be revoked in the event of divorce, have an age stipulation, and name back-stop trustees to take the place of unavailable trustees.

Succession of a Trustee

There may be cases where even the most thoroughly vetted trustee isn't up to par. There are also the unfortunate incidences like a trustee stealing or negligently leaving it open to disqualification and tax penalties. The trust may have a fail-safe where the grantor or a beneficiary can replace the trustee.

Many trusts allow the named trustee(s) to select who succeeds them. Some may allow the trust beneficiaries to name a successor. Both approaches might result in problems. For example, the trustee could try to sell the trusteeship. Meanwhile, beneficiaries may threaten to remove a trustee if their monetary requests aren't indulged. While beneficiaries may take a trustee to court for removal, this can be an expensive endeavor since the trustee can pay for their defense through the trust. To solve the conundrum, you might have a removal option available to beneficiaries, but already have successors named. Consult with your attorney about this issue.

Having co-trustees helps to balance the power, but since trustees often have separate roles, even this doesn't ensure that trustees will act in the interest of the beneficiaries. There's also the issue that trustees have a vested interest in keeping the trust flush since fees and salaries are usually based on a percentage of the trust value. Even so, institutional trustees are often more reliable to act in the best interest of the beneficiaries since they are subject to internal, state, and federal audits and have much more to lose if sued for restitution.

Your attorney can provide more information and guidance in your situation.