United States: Did You Choose The Right Trustee?

Selecting the right trustee to administer the property you have placed in a trust is an important decision, and can be more difficult than choosing the executor who will administer your estate. Unlike an estate, which exists for a finite period of time (typically one to two years), a trust can last for multiple generations. Your trustee will be responsible for making decisions about how to invest the trust assets, and will, in most cases, have discretionary authority over whether or not to make distributions to the trust beneficiaries. Therefore, it is vital to choose a trustee with whom you and your beneficiaries are comfortable and who has the financial acumen to manage your trust appropriately.

Trustee Qualifications

A trustee should have sound professional financial judgment, and be reliable and trustworthy. The trustee will be responsible for collecting trust assets, paying bills, filing trust tax returns and accountings (and hiring accountants, if necessary), and investing the assets in the trust (or hiring financial advisors to do so).

A trustee, as the term suggests, must be trusted by both you and the beneficiaries. He or she must make choices based on the evolving circumstances of the beneficiaries. The trustee's responsibilities include determining the size and timing of distributions to the beneficiaries, balancing the competing interests of income beneficiaries and remaindermen, considering whether to make loans of, or pledge, trust assets, and monitoring the investment performance of the trust.

Should You Select a Family Member?

There are good reasons to select a family member to serve as a trustee. Family members may be willing to waive their entitlement to statutory (or any other) compensation for serving as a trustee. Moreover, family members may have a stake in the success of the trust, prompting a heightened level of care and concern for its assets. Family members may also know the beneficiaries well and, therefore, be able to make informed decisions regarding distributions based on personal knowledge of the beneficiaries' circumstances. Beneficiaries may also feel more comfortable approaching a trustee who is a family member as opposed to an unrelated individual or a corporation.

However, selecting a family member as a trustee can present some obstacles and result in certain limitations. If a family member has a stake in the success of the trust because he or she is a beneficiary, his or her authority over trust distributions will be limited, for tax reasons, to an ascertainable standard of health, education, maintenance and support. If you would prefer that a trustee have broad discretionary power over trust distributions, you will need to name at least one trustee with no beneficial interest in the trust. Even if there is a family member available to serve who will not have any beneficial interest in the trust, family dynamics may be such that personal conflicts might arise, resulting in an unfriendly, or even hostile, relationship between the beneficiaries and the trustee.

Should You Select an Unrelated Party?

An unrelated party, such as a close family friend, professional advisor or bank is another option. A close family friend would likely be both objective and caring. However, there may be an issue as to whether you would feel comfortable with him or her having an intimate knowledge of family finances.

You may consider selecting a professional advisor, such as your attorney or accountant, to serve as a trustee. Such an individual would likely be knowledgeable and qualified to perform the duties of a trustee. In addition, if you have had a long-standing relationship with this person, he or she will know and understand your family dynamics, your finances and your wishes with respect to the trust.

If you are creating a long-term "dynasty trust," you may want to consider naming a bank or trust company as trustee, since the trust will last beyond the lifetimes of any individuals you may know. An institutional trustee might be named to serve only after a line of succession of individual trustees comes to an end, or, alternatively, might be named to serve immediately upon the trust's creation, either alone or in conjunction with an individual trustee. Banks have the professional know-how and experience to manage trusts, and you and your family (such as your parents and grandparents) may already have long-established relationships with certain institutions that have managed your family wealth for years.

Revisiting Your Choice of Trustee

Once you have carefully selected your initial trustees and their successors, keep in mind that, especially with respect to your testamentary documents, you should revisit those selections from time to time to ensure that they are still appropriate. One's circumstances and relationships often change through the years, and you will want to make sure that the person or institution you selected a few years ago is still the right choice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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