Estate plans often include trusts. Whether establishing a new trust, modifying an existing trust or dealing with a transition of the incumbent trustee, selecting the person or institution who will act as your trustee is one of the most important decisions you and your family members will make.
So what are your options?
The legal qualifications are simple: the trustee must be a bank or an individual over the age of 18 who is competent to manage his/her own affairs. The practical qualifications, however, are more complicated. Most importantly, a trustee must have the skill set to properly administer the trust and must possess and exercise good judgment. Does the trustee truly understand the duties and responsibilities of a trustee and how to administer the trust and apply best practices? If not, will the individual recognize what he or she does not know and seek out and follow that advice? In addition, because a trusteeship often is a long-term commitment, you may need someone who will be available for a long period of time. Finally, serving as a trustee can be time consuming and you will need to ensure that your choice has the time and is committed to serve the needs of the beneficiary.
With these things in mind, you have several options:
Should I Choose a Family Member?
Choosing a relative as your trustee can offer several advantages. She would likely share your values and the family dynamics to help navigate emotional issues. She may also understand the operation, importance and role of the family business to the family and in the estate plan. Finally, she may understand the objectives in creating the trust and stay focused on achieving the settlor and family’s goals.
Plus, they usually work cheap!
That being said, choosing a family member has its drawbacks. He may lack the time and skills to effectively administer the trust and to carry out the settlor’s objectives. He also may have difficulty saying “no” to requests from other family members regarding investment opportunities, loan requests and distribution requests or have conflicts of interest.
Choosing a family member can also cause or exacerbate bad feelings among family members. A trustee’s power and control over your assets and to make distributions can cause resentment among beneficiaries. If the family member fails to effectively manage the trust, it could damage familial ties.
What If I Choose a Friend or Business Associate?
A friend or business associate may not have some of the objectivity issues associated with family members serving as trustee, while still ensuring that the trustee is someone with insight into the family, its values, its business, and its affairs. Friends or business associates also can be a good choice because it is easier for someone outside the family to say “no” to requests that should be refused. She would not have the emotional baggage of a family member and can make decisions knowing she will not suffer the family repercussions that could occur from an unpopular decision.
And, like family members, they may agree to work cheap!
Of course, friends and business associates can have their downsides. Like family members, they may lack time, experience and skills to properly administer the trust. Saying “no” could still be a problem too.
Should I Choose an Institution Instead?
Selecting an institution to serve as trustee may not present the problems caused when a family member, friend or business associate is selected as a trustee, because institutional trustees have the experience, resources and systems to effectively administer the trust. They also can be objective and will not have familial conflicts of interest. They probably can more easily say “no” to requests that should be declined. They also have continuity so the family will not have to choose a successor down the road when an individual trustee dies or becomes incapacitated. Finally, they will have insurance to cover a mistake, so it can be easier to recover damages for ineffective management or mismanagement of the trust assets.
Sound ideal? Keep in mind they have policies and procedures they must follow and decision-making can take time. They may be more conservative than your family would like. For example, they can be very uncomfortable holding concentrated positions in family controlled enterprises and in private equity investments. Trust officers also will be less familiar than others with your family’s circumstances and values.
Institutions have some other disadvantages you might not face with other choices. Trust officers sometimes move to other positions within their organization or to entirely different institutions, and their replacements will need to be “re-educated” about the family and each trust when turnover occurs. Finally, institutions might be acquired, and the character of the institution may evolve and result in a different institution acting as your trustee than the one selected.
Is a Professional Advisor a Better Choice for Me?
A professional advisor can embody the best of friends and institutions, as he may be more likely than family or friends to have experience and skills to administer a trust (although that can vary and is not guaranteed). Professional advisors may also know the family and be well acquainted with the settlor’s intent and goals for the trust. The advisor also may be objective and trusted by the beneficiaries. Using an advisor may also enhance family privacy by limiting the number of individuals with involvement in the family’s affairs.
However, not every advisor is suitable to serve. Some trusted individuals may nevertheless lack expertise or resources to serve. Some firms prohibit individuals associated with the organization from serving as a fiduciary. In addition, not all family members may trust or respect the advisor, and his power over the trust assets may cause nervousness or resentment in the family. And like family members, friends, and business associates, an advisor will eventually die, may become sick or incapacitated, or may retire, thereby necessitating the appointment of successors.
Choosing a trustee is an important decision, and your advisors should be a great help as you consider the pros and cons of each of these options on your particular situation. With some thoughtful consideration, you can choose the trustee that best meets your needs.