8.20.20 | Wealth of Insights
What could be more important than choosing the right people to carry out your wishes after you are gone? No matter how well you develop your estate plan, you don’t want it to potentially fall apart by naming the wrong fiduciary or by not providing responsible parties with the tools they need to succeed. It starts with understanding and defining their roles. As a follow-up to Choosing Executors – A Life and Death Decision, this article will examine the role of the trustee and highlight issues that should be considered before appointing one.
Protecting Your Legacy
Trusts are estate planning tools that are used by families and individuals to conserve and protect assets for future generations. Choosing the right trustee to carry out your wishes is an important and oftentimes difficult decision, as the weight of responsibilities the trustee is entrusted with can be heavy.
The duties of a trustee can include, but are not limited to:
- Carrying out the terms of the trust, including timely distributions to the beneficiaries;
- Providing timely and accurate reports (or accounts) of trust assets;
- Making decisions on investment strategy and occasionally complex tax and administrative matters;
- Establishing open lines of communication with the beneficiaries; and
- Avoiding conflicts of interest, such as playing favorites among the beneficiaries or self-dealing.
Trustees, whether appointed in an intervivos (i.e. lifetime) or testamentary (i.e. in a will) trust agreement, carry out the objectives of a grantor (i.e. the individual creating the trust) by following the terms of the trust. Selecting a trustee is similar to choosing an executor; however, there are several significant differences. Most notably, the fact that a trustee’s responsibilities commonly last for a long period (frequently for at least one generation of beneficiaries and often beyond) while an executor’s role is typically concluded in under two years.
Due to the continuity of responsibility, a trustee should be a person or institution that a trust beneficiary is comfortable with and able to consult with on all topics. This is especially important when it comes to understanding the amount and frequency of income and/or principal distributions, what expenses are to be paid, and by whom. Family, business, investment, and tax considerations can add further layers of complexity to the selection process.
Ideally, a named trustee should possess the expertise to collect assets (from an executor if it is a testamentary trust), invest assets, pay bills and ongoing costs, file accountings of trust assets, and manage money for beneficiaries. In circumstances where the trust is designed to last for many years or generations, you may name an institution as a successor trustee.
When considering a potential trustee, remember that these individuals are typically granted flexible and broad authority to deal with trust assets as they see fit so long as their decisions align with the mandate of the trust instrument, and the assets are managed in a reasonable and prudent manner.
Types of Trustees
Generally, there are two types of trustees from which to choose from — individuals (often relatives or close family friends) or corporate trustees. Each comes with their own distinct set of advantages and disadvantages.
Non-corporate or Individual Trustees
First, let us examine the upside of choosing an individual trustee. For small to medium-sized trusts, choosing a family member to serve as trustee can be beneficial because they usually have a personal stake in the trust’s success. A close friend or relative is likely to have personal knowledge of the family’s financial situation and unique dynamics — making him or her better able to carry out the wishes of the grantor. And, generally speaking, the expense involved in compensating an individual trustee is lower than it would be with a corporate trustee. Keep in mind that complex financial matters may require the hiring of outside professionals by the individual trustee.
Now let’s look at some of the potential downsides to choosing an individual trustee. The first thing, obviously, is that individuals do not live forever while, in concept, the office of the trust lives on in perpetuity. Sometimes, individual trustees find their duties too taxing: they have other obligations such as work and family that could limit the time they have to deal with matters relating to the trust. There may also be income and/or estate tax consequences in naming certain individuals as a trustee. Additionally, issues of ‘playing favorites’ among the beneficiaries can and do arise. There may even be unethical situations where the individual trustee may be diverting trust assets to their own pockets or for their own benefit.
It is also not uncommon for individual trustees to find out that they simply do not have the requisite experience to handle financial decisions that often come with being a trustee. A trustee must have the necessary financial acumen to invest and manage trust assets wisely. As such, considering naming a co-trustee or successor trustee who has some specialized legal or financial knowledge could prove to be beneficial.
Corporate trustees can be expensive, but they typically do not come with the potential downsides of individual trustees. For instance, they have the necessary financial expertise and must adhere to strict compliance standards that guard against theft and favoritism. However, before selecting an institution, it is important to discuss its schedule of fees with a trust officer in order to determine exactly which services are included and which will result in additional fees. Some institutions have minimum fees, which make them costly for small or medium-sized trusts. It is best to do your research and interview several institutions.
Be aware that corporate trustees typically follow a conservative investment strategy that has both advantages (relative security during downturns) and disadvantages (low to modest growth). Also, they may be more impersonal than family members and may not be willing or able to listen to and discuss a beneficiary’s needs and questions as often as an individual trustee. However, when conflicts among beneficiaries arise, this can be somewhat advantageous.
Selecting the people who will carry out the objectives of a trust you create is a complex and time-consuming process. It is valuable to consult with your financial advisors to help you find the people that are both qualified and able to provide you with a high level of confidence in their future actions as trustee.
Berdon LLP New York Accountants