One of the most important decisions an individual makes during the estate planning process is to choose a trustee to act after the death or incapacity of that person. Many people find that the right thing to do is to choose an individual, like a family member or close friend, for this important fiduciary role. But there are just as many cases in which it makes more sense to designate a corporate trustee that offers trust administration as a professional service.
A corporate trustee is a professional fiduciary — usually a trust company or the trust department of a bank. These entities are comprised of qualified professionals who understand the rules of trust administration and prudent investment management, are consistently available, and who can avoid the pitfalls of challenging family dynamics.
Who Should You Designate as Trustee?
Whether you decide to choose an individual or corporate trustee, it’s important to have a sense of the specific knowledge and expertise that successful trust management demands.
On the technical side, a trustee should be well versed in tax law, financial concepts, and be comfortable navigating complex legal documents. Soft skills include being thorough and detail-oriented, communicating well with professionals and trust beneficiaries, and knowing when to ask for help!
Taking inventory of these skills and traits in yourself and your family members can help you determine whether it makes sense to designate an individual family member as trustee or outsource the role to a professional.
Common Challenges for Individual Trustees
Time, Cost, and Expertise
People are often caught by surprise when they realize just how much trust administration requires of them. The trustee is responsible for trust funding, investment management, bill pay, compliance with record keeping and reporting requirements, filing tax returns, and making distributions per the terms of the trust. And, while families with smaller and simpler trusts are better positioned to manage them effectively without a professional trustee, individual trustees of larger and more complex trusts may feel it’s like taking on a second full-time job!
For most individuals, proper trust administration entails hiring a stable of professionals ranging from estate planning attorneys to CPAs, investment advisors, real estate agents, and more. Professional service fees add up quickly and it can be time consuming and stressful to coordinate with different service providers. Individuals may think naming their spouse, responsible oldest child, or best friend as successor trustee is efficient and cost-effective. However, a lot is being asked of that named individual trustee in terms of time and expertise, to say nothing of exposure to potential future legal liability!
Individual Trustees & Balancing Family Dynamics
As you might expect, putting oneself and one’s family in such a stressful position can both exacerbate existing tensions and create new ones. Dealing with the aftermath of a loved one’s death is difficult emotionally. Add to that the long-standing disputes around finances and assets and you’ve got a recipe for potential disaster on your hands.
It’s perfectly understandable that family dynamics find their way into estate planning and management — it’s one of the most personal endeavors a family can undertake. But naming the wrong trustee can cause even trivial matters to take on greater significance and lead to unnecessary family drama or even trust litigation in extreme cases. I’ve seen families where significant disagreement arises over the division of personal property or the sale of the family home or business. These conflicts also arise in second marriage situations where the new spouse is making important financial decisions that directly impact grown children from the first marriage.
Other potential landmines for family trustees include mistaking the amount of money left to each person as the measure of their parents’ love, letting personal grievances justify disputes over who gets what property, and attempting to control information for the trustee’s benefit or to protect someone else.
Personal relationships and fiduciary responsibilities are concerned with wholly different questions. While it may be valid to feel that a sibling shouldn’t get mom’s classic car because they never went to see her in the hospital, a trustee has a duty to execute the terms of the trust fairly and impartially, regardless of their feelings about a beneficiary’s behavior or family history.
The Fiduciary Responsibility of Trustees
Trustees have a fiduciary responsibility, which means they can be held liable for how they manage the assets held in trust. This should give pause to anyone who hopes to pay themselves handsome administration fees, act on conflicts of interest, or engage in other forms of self-dealing.
Navigating the requirements of a fiduciary can also be tricky for people who are acting in good faith. Let’s say, for example, that an eldest son has been designated as the trustee and doesn’t want to lose any of the family’s money. He invests the trust assets in a savings account money market, a decade passes, and sure enough, the value of the trust is fully intact. But during that time, his excessively conservative investment decisions may have cost the family millions of dollars. The siblings are within their rights to sue their brother for damages under a claim for failure to prudently manage the trust assets.
Fiduciary responsibilities also supersede a trustee’s personal preferences for sharing information. A trustee has a duty to keep the qualified beneficiaries of a trust adequately informed about the administration of the trust and to provide them with annual accountings showing assets, market value, receipts and disbursements, and fees. In one case I know of, an individual trustee withheld documents about the family business and trust accountings from her brother because he had behaved irresponsibly in the past. The matter was concluded after three years of litigation, and thousands of dollars of attorney fees, with the determination that the trustee had to provide accurate and timely information to all beneficiaries, including her brother.
Benefits of Professional Trustees
A professional trustee can help you avoid all of these potential pitfalls. In fact — contrary to what you might think — a corporate trustee is often times a time-saving and costeffective trust management solution. Not only are bank trust departments fully staffed with subject matter experts, they also have relationships with outside service providers they work with on your behalf to ensure that your assets are appropriately managed.
Most corporate trustees set a flat rate for administration of the assets titled to the trust over which they are named as the trustee. This fee for comprehensive trust administration, asset management, and fiduciary tax preparation services can be a relatively modest sum when compared with the combined rates of attorneys, CPAs, real estate agents, investment managers, and others.
Individuals and banks both have fiduciary responsibility, but the latter are held to a higher fiduciary standard since a corporate trustee has professional investment management and trust administration expertise. Finally, corporate trustees have no stake in your family dynamics and are therefore able to execute terms impartially.
A hybrid trustee arrangement — in which a family member works with a corporate trustee as a co-trustee — is another option. In this situation, the family member participates in key decisions without the burden of the “heavy lifting” of day-to-day trust management.
The individual trustee can focus on the distribution of personal property and making decisions about unique assets (like whether to sell the family cabin). A family member may also help determine the amount and timing of discretionary distributions for things like a grandchild’s education.
The bank handles the technicalities, including but not limited to:
- Paying decedent’s final bills and funeral expenses
- Gathering financial assets
- Managing investments prudently
- Selling real estate
- Filing personal and fiduciary tax returns and making tax elections
- Distributing trust assets to individual beneficiaries and charities
Other Trustee Considerations
It’s a good rule of thumb to revisit your estate plan with your attorney every five or six years to accommodate changes in your personal circumstances, as well as tax law, state law, and federal law changes. This gives you a convenient opportunity to review your trustee designations. Maybe your family has experienced a new marriage, death, or divorce. If you need to change your beneficiary designations for major events like these, it’s important not to delay making updates to your estate plan.
It’s also worth noting that while a bank’s trust department is a good source for expert legal and tax information, individual trust advisors don’t draft any of your family’s estate planning documents. Your trust is drafted by your own estate planning attorney who provides you with legal advice and will advise you on your choice of successor trustee.
Every family is different, and what works for one trust will not necessarily work for another. After balancing all considerations — the assets in question, the roles needed for management, the costs involved, and the family dynamics at play — you will be well-positioned to name your trustee.