SELECTING YOUR TRUSTEE

One of the most difficult decisions in estate planning is choosing a trustee – someone you trust to perform the critical role of managing your trust and carrying out your wishes. The trustee must be someone you believe has your best interests at heart and has the ability to follow the terms of the trust. This is a tough decision, requiring serious thought about the qualities and skills of the person and/or institution you might select. This article provides an overview of some of the most common issues involved in selecting a trustee.

First, it is important to know what a trustee does. Basically, the trustee has two main jobs: 1) managing or overseeing the management of the assets held in the trust, and 2) administering the trust - accounting for distributions of trust income and principal to the beneficiaries and others, filing tax returns and other duties.

Characteristics of Trustees

Trustees can be divided into two broad categories: 1) individual trustees - loved ones such as your spouse, relative or close friend, and trusted advisers such as your lawyer, accountant, insurance agent or financial planner; and 2) corporate trustees – an independent trust company, a bank trust department or a trust company affiliated with a financial services firm such as a brokerage firm or insurance company.

Each option has positive and negative attributes. Your decision will depend upon the complexity and size of your assets, your preference toward using someone you know versus a corporation, and the range of choices available to you. But the common traits all trustees should possess whether they are individuals or corporations are integrity, good judgment and professional competence.

Individual trustees typically have more intimate knowledge of your family situation and therefore can be more sensitive to your family’s needs. Your close relationship with them gives you confidence about their loyalty and integrity. However, a friend or relative may not have the financial savvy to competently manage, delegate and monitor the investment of the trust assets or do the required administration.

And choosing an individual trustee may place a burden on them due to the time and energy involved, as well as subjecting them to the crossfire between demanding beneficiaries.

A trusted adviser, such as your accountant and/or attorney, may also be a good choice because he or she has substantial knowledge about you, your beneficiaries, and your goals and objectives, while also having the added legal and financial know-how needed to competently fulfill their role. As with loved ones, your prior relationship has built confidence in their loyalty and integrity. Such an adviser is close enough to you to be sensitive to your personal wishes, but distant enough to remain objective should conflicts arise.

A corporate trustee, such as a bank trust department or independent trust company, can provide most of the services you will need, but may fall short in understanding the dynamics of your family or making certain sensitive judgments.

The most important advantage of a corporate trustee is in its ability to provide the financial expertise needed to ensure the trust assets are invested wisely and in the beneficiaries’ best interests. This is particularly important for larger trusts that may require more sophisticated investment and management capabilities.

A corporate trustee must remain objective, making sure the assets are securely held and the account administration meticulously follows the trust document’s guidelines as you planned. However, the corporate trustee cannot be as sensitive as a spouse or family member might be, and therefore may be too inflexible in responding to beneficiary requests.

Having a corporate trustee involved can also provide continuity for trusts for succeeding generations. An individual trustee, whether a loved one or a trusted adviser, will eventually become unable to fulfill the trustee role. When this occurs the beneficiaries will then have to appoint another trustee either by majority vote or by going to court. A trust institution, as a corporation, has infinite life allowing it to handle succeeding generations.

The Case for Co-Trustees

One of the most practical and satisfying solutions in many cases is to appoint co-trustees, a combination of an insider, who shares your values, and a professional corporate trustee.

There are three co-trustee combinations that offer balance and the greatest overall rewards: 1) loved one/trusted adviser, 2) loved one/independent trust company and 3) trusted adviser/independent trust company.

An independent trust company can provide the financial and administrative services while the individual trustee, who has a deeper understanding of your wishes and the beneficiaries’ needs, can be given the power to dismiss the corporate trustee for reasons such as poor performance, poor service or unreasonable fees. The individual trustee’s role becomes that of overseer and creates a system of accountability. The time and energy spent is reduced for the individual.

If the individual trustee charges for their time, it will cost more than just hiring a corporate trustee, but the incremental cost should be more than offset by the beneficial synergies of these trustees working together.

Finding a Trustee

Selecting a loved one or trusted adviser as a trustee or co-trustee hinges on their willingness to serve. You must explain your wishes to them and outline what their specific responsibilities will be. To help them make the decision, give them an idea of the estimated time commitment involved and any potential conflicts between beneficiaries.

Referrals from family, friends or your trusted adviser are usually the best way to select a corporate trustee. Schedule meetings with several candidates with good reputations. Meet with the individuals who will be managing and administering your account. Include your trusted adviser and family members in the meetings so that they can be part of the decision-making process.

In the meeting you will want to get some general information about the institution and the people with whom you will be working. For example, find out how long they have been in business, what the size of their staff is and what their credentials are. To get a feel for the level of personal attention you might expect, you should find out how many clients the manager is responsible for and how high employee turnover has been in the past.

You should also ask questions regarding administration of the trust. Primarily you will want to ask the administrator how distributions to the beneficiaries will be handled, which administrative services the institution provides and which ones you may have to procure elsewhere.

Next, you will want to discuss how the trust assets will be managed. How has the institution’s stock and bond portfolio performance measured up to the comparable benchmarks? What are the decision-making criteria they use in managing portfolios? How do they manage risk? If your trust will include a family business, real estate or other non-financial assets, find out about the company’s expertise in those areas.

Finally, you should ask for a schedule of fees for the various services provided such as asset management and trusteeship. Also inquire about commission rates, means of communication and any other fees that might be charged. All of the questions you raise are designed not only to give you information you need but also to see how an institution begins to build your trust.

The Importance of Reviewing Your Trustee Selection

Lastly, it is very important to review your trusts and the trustee designations from time to time to make sure they still conform to your wishes. You should do this especially if anything has changed significantly in your situation or your trustees’. If the trustee or trustees you have selected are unable to serve or are no longer your first choice, your attorney can amend the trust document to replace them.

The assets you have accumulated are very important to you and your beneficiaries, and your trustee-decision should be made with great care.

Back to News & Views