Tips on Choosing a Trustee
When creating a trust, it is always necessary to name current trustees and successor trustees, successor trustees being those persons or institutions that take over after the initial trustees cease to serve, whether due to death, incapacity, or other reasons.
It is important to understand that an excellent trust may be ruined due to the appointment of a trustee who is incapable or unwilling to carry out the terms of the trust.
Perhaps too often parents name one or any number of their children to handle the distribution of their estate.
If the children all get along, have trust and confidence in each other, and are being treated in a manner that would seem to most persons to be fair, then perhaps naming one child or a number of children will be appropriate.
This approach is very common and often works just fine.
But there may be certain trusts which require great care in naming trustees and in defining the scope of the trustees’ powers.
Any person appointed as trustee must be a person who can be trusted to carry out the terms of the trust without interjecting their own biases into the process.
Also, the trustee should be a person who will get in and get the job done. I hear stories from beneficiaries who tell of how their trustee, often a sibling, is not doing anything, and months and years have passed without much being done in the administration and distribution of the parents’ estate.
A trustee should be a person who has good organizational skills, and a good work ethic, and also will have the time and sufficient financial acuity to enable them to properly administer the trust.
If the Trustee does not at a minimum have these qualifications, the purposes and benefits of the trust will likely be compromised. It is not necessary that the trustee be a CPA or lawyer, but they should be someone who has a basic understanding of finances and investments.
The gaps in the trustee’s knowledge can be bridged as long as the trustee has enough insight to know when additional professional help from advisers, i.e. CPA’s, lawyers, and investment professionals, is needed.
The simplest form of trust, one of which the entire trust estate will be distributed outright among a few individuals and institutions, can be handled by almost anyone with integrity and a good work ethic.
But many trust are established for minors, for heirs who have special needs and are unable to handle their own inheritances, and for persons who do not have the discipline to receive a substantial inheritance and hold onto it beyond the temptations of the next holiday season.
More Complicated and Extended Trusts
For younger beneficiaries, typically those under age twenty-five (and where substantial amounts are involved, most such trusts extend out to ages thirty and beyond), the trustee is directed to retain the younger beneficiary’s trust share for their “health, education, maintenance, and support.”
This is a term of art used in estate documents which essentially means that distributions should be made in a manner consistent with that beneficiary’s way of life.
So if the beneficiary has been attending college and paying for some of their education with summer work but some of the cost funded by parents, then normally the trustee will utilize the beneficiary’s estate in a manner consistent with how the beneficiary was being assisted before receipt of the inheritance.
If the beneficiary has already demonstrated the skills to work and save and handle their own monies in a reasonable manner, then the trustee will likely have more confidence in making larger distributions where such discretion is provided for in the trust document.
I am comfortable in naming a parent to care for a minor child’s inheritance as long as 1) the parent has demonstrated the ability and skills to provide for their child and 2) has sufficient income of their own to not be tempted to “borrow” from their child’s inheritance.
If there is a concern that the parent might be tempted to invade their child’s trust fund, then it is best to name a different person as trustee, typically a financial institution that will act independently and in a fiduciary capacity.
When an institution such as a bank or trust company acts in a fiduciary capacity, that institution is bound to act in the best interests of the beneficiary.
Although such professional trustees charge fees, usually around 1% of the amount under management each year, the benefits of professional, independent, license, and bonded management are worth the costs.
I usually counsel against naming a child as trustee of the child’s sibling’s trust unless it is for a disabled child who either does not comprehend the situation or who understands the need for their sibling to handle their trust.
But if a trust is established for a child because that child is a spendthrift or has substance abuse problems, I will always recommend against the sibling being a trustee of such a trust.
Consideration must be given to how long the trust might continue. Many trusts can go on for decades, even longer.
Be sure to name trustees who can act for long periods of time and also provide a means for a proper person to be appointed to carry on with the trust in the coming years.
Some beneficiaries may live into their 90’s, so it is necessary to either 1) name a successor trustee such as a bank or trust company.
Other trusts, sometimes called “dynasty trusts,” are established to continue for multiple generations, so a method for appointing appropriate trustees as the years go by is critical to the success of the planning.
The Trustee must be capable of handling the estate received.
For example, if the estate includes an operating business, is the trustee capable of managing the business? Will the Trustee be fair to all beneficiaries in managing the business?
For example, what if a child is named as a trustee and also holds an interest in the family business. That child as trustee may be able to manage things in a way that could benefit him, to the detriment of his siblings.
For example, if the child/trustee is working in the family business, he may take a large salary, thereby wiping out any profits which might otherwise be distributable among the siblings.
In such cases, it might be necessary to either appoint an independent, non-family member as trustee or the business must be allocated only among those children who are taking an active role in managing the business.
The larger the trust, the greater the need for professional assistance.
It may be quite simple for one or two of the children to distribute a $1 million trust estate among the five surviving children, but it is a wholly different matter to drop a ten million dollar portfolio in the lap of a thirty-five year old. So again, professional services can be vital.
Clearly, great care must be taken in the designation of the trustees of your trust.
Don’t let your adviser get away with the simple solution of naming the children in something like birth order and calling it good.
The considerations described above and many more pertaining to specific cases must be brought to bear upon the appointment of a proper trustee.