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Choosing a Trustee

You’ve decided to establish a living trust.  Your attorney tells you that you and your spouse will be trustees during your lifetime, but that you need to appoint a successor trustee who will take over when both of you are gone.  So…who to choose?  What are the necessary qualifications?  What are the options?

General Considerations

One of the most important decisions for trust grantors concerns the selection of a trustee.  Bear in mind that being a trustee can be a lot of work, and the work can often be complicated (although you may be able to hire a professional to deal with the more complicated aspects).  Remember that a trustee’s duties continue for as long as the trust exists, and may require expertise in collecting estate assets, investing money, paying bills, and filing accountings and managing money for the beneficiaries.  The trustee generally also has to spend a lot of time consulting with the trust beneficiaries about their needs, so the ideal trustee would be someone with whom the beneficiaries feel comfortable.

The general qualities you want to look for in a trustee are: honesty, organizational skills, and the ability to use good judgement and to exercise it impartially.  If you are looking at choosing a non-professional, such as a relative or friend, a willingness to seek professional advice (and the ability to manage the advisors) isn’t a bad quality either.  (You don’t want someone who insists they will be able to handle every aspect of the trust’s management themselves, because unless they are a lawyer, CPA, and financial advisor all in one, odds are they won’t be able to do so.)  You also want to choose someone who is willing to serve as your trustee.

Keep in mind the location and types of the assets in the trust, and the location of the beneficiaries.  If the trust contains substantial real estate, for example, you might want to consider a potential trustee’s familiarity with the financial and tax implications of the property.  If the trust contains a family business, think about a potential trustee’s familiarity with that business.  And since the trustee may have to consult frequently with the trust beneficiaries, you might consider choosing someone who lives near those beneficiaries, to make communication easier. 

Lastly, consider the intra-family dynamics of the beneficiaries, and the potential trustee’s understanding of those dynamics.  You want someone who will be able to handle familial conflicts that might arise among the beneficiaries.

So, who should serve as your trustee?  A family member?  A close friend?  A financial institution?  The list of potentials, and the requirements they need to fulfill, can be intimidating.  Here are some ideas to keep in mind that may help narrow the list.

Family Members as Trustees

 The benefit of choosing a family member as a trustee is that they (usually) won’t charge a fee, and will have a personal stake in the trust’s success, theoretically making them more likely to manage the trust well.  A family member is more likely to understand (and be responsive to) the needs of the beneficiaries, and will probably also have a better understanding of any peculiar family dynamics that may be involved.

The downside to choosing a family member is that they will often lack financial expertise, and so will have to pay to hire professional help.  Mortality, of course, is also an issue.  Banks don’t die, and so will be able to administer the trust for as long as the trust is in existence, but if a family member is chosen and the trust is intended to last for generations, successor trustees will need to be named.

The biggest issue with choosing a family member, however, is the potential for family conflict.  Depending on their relationship, family members may have problems with what the beneficiary wants or what is best for him or her.  Sibling rivalries may also complicate matters if one sibling serves as trustee for the others.  A professional manager, on the other hand, doesn’t face such pressures.

However, if you have a family member who is competent to handle the financial matters involved, has the time and interest to do so, and if family conflicts are not a problem, then naming a relative as a trustee may be a good idea.  However, you must also consider who the successor trustee will be in the event of the death or incapacity of the initial trustee.

Close Friend as Trustee

The advantages and disadvantages to choosing a close friend to serve as trustee are fairly similar to those of choosing a family member.  A close friend will have a good understanding of what the grantor wishes to accomplish under the trust, and is likely to have a close relationship with the beneficiaries.  Fees are also generally lower than that of a professional trustee.

The disadvantages, of course, are again a potential lack of experience when dealing with financial matters, and the potential for conflict with the beneficiaries.  The beneficiaries may resent having a family friend given the authority to make decisions for family members and family members’ inheritance, which could create conflict.

Institutional Trustees

The benefit of choosing an institutional trustee, such as a bank or trust company, is that the institution will be able to manage your trust for decades, if necessary (see above: banks don’t die), and will have knowledge and experience concerning financial investment and investment options.  Institutions are also by nature objective and regulated by law, so if you are particularly concerned about the honesty and impartiality of family members or friends, this may be the best option.

However, institutions can also be costly; most charge an annual minimum fee that can be around one or two percent of the trust’s assets.  Institutional trustees can also be very impersonal.  The trust beneficiaries won’t necessarily always be dealing with the same person, since personnel move around and the bank itself could change hands.  This means that the actual person the beneficiaries may be dealing with won’t know them as well, and so may not be as well equipped to handle the beneficiaries’ questions, needs, etc.

Private Fiduciaries

A private fiduciary is similar to an institutional trustee, in that they are a hired professional.  The major advantages and disadvantages are fairly similar to that of an institutional trustee as well: a private fiduciary will have experience with financial investment, but probably won’t be well known to the trust beneficiaries.  However, rather than dealing with an entire corporation, you are dealing with an individual professional trustee, which could be an advantage; one person is generally easier to get to know than several. Private fiduciaries also usually charge by the hour for the services they provide, which, depending on the size of the trust, may be more or less than the specific percentage charged by banks acting as trustees.

Co-Trustees (Yes, you can have more than one!)

If the property to be administered is complex, but you still want to maintain a personal touch, there is always the possibility of naming more than one trustee.  This enables you to pick different people (or institutions) with different strengths, and the grantor can decide how the multiple trustees will make decisions.

However, the co-trustee should also be familiar with nuances of your particular trust, and should also be sensitive to present or potential conflicts between family members you’re considering naming as co-trustees.  You must also establish in the trust which co-trustee is going to be responsible for which task, and create a mechanism for resolving disputes among the trustees.  (For this reason, you don’t want to have too many trustees.  The more trustees, the more unlikely it is that they will agree on anything.)

By Genevieve Hoffman 7/20/10

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