A trust is only as good as the person selected to manage it. It might a daunting process, but selecting the right trustee and having fail-safes in place are crucial to ensuring the complexities of a trust are handled appropriately.

Relative Trustees. Many experts agree that a relative is a logical trustee choice for trusts designed to transfer wealth within the family. When underage children are involved, it’s important to select a trustee that has a familiarity with the needs and circumstances of the family and will do their best to ensure the current lifestyle is maintained, but that doesn’t have a conflict of interest from being the actual caregiver of the children. Likewise, most experts agree that relatives are logical trustee choices for a trust that’s mostly comprised of real estate, business assets, or an asset that would otherwise need ongoing maintenance. In fact, most corporate fiduciaries will not get involved in such a situation due to the liability. It’s vital to select a trustee that has a good knowledge of financial matters and that possesses the skills necessary to be a trustee.

The Downside of Relative Trustees. One of the most common mistakes individuals make is assuming that trustworthiness equates to capability. Selecting a trustworthy family member doesn’t guarantee the complex requirements of the trust will be fulfilled, especially if the trustee is a novice on financial matters. Even if the family trustee is knowledgeable, there might still be a downside to selecting a family member from a complicated family dynamic. The positive aspect of the familiarity that a relative has with the needs and circumstances of the family might also be a negative if there are hard feelings or biases involved. Being a trustee isn’t like asking someone to water your potted plant. It’s a job that comes with tremendous responsibility and time consumption. Most experts recommend compensating any trustee, family or not, equivalent to at least one percent of the value of the trust.

Professional Trustees. Professional trustees can be a bank, financial advisor, independent trust corporation, or any other objective financial professional. Some people even opt to use various entities as co-trustees to ensure against competing interests from forming. Aside from absent familial strife, institutional trustees also usually have a broader range of fiscal expertise and more time to manage the trust than relatives.


p> The Downside of Professional Trustees. Of course, none of the above entities will have familiarity with the beneficiaries. A trust essentially determines how distributions to beneficiaries are issued. They generally allow for certain factors, such as medical or education needs. A professional trustee might not know that a beneficiary asking for additional distributions has a substance abuse problem. Likewise, additional distribution requests for legitimate purposes could also be overlooked, dealt with impersonally, or have a long approval process. Another downside is the expense. Professional trustees usually earn a percentage of whatever the value of the trust is and fees for any services rendered.

Why Select One Or The Other? Sometimes the downside of professional and relative trustees can be diminished by selecting both to serve as co-trustees. Some also use this type of co-trustee arrangement as a tax and estate law benefit. The professional trustee may be selected from a state, such as Delaware, with friendlier trust and tax laws.

Careful Selection. All trustee candidates should be carefully vetted. As far as professional trustees go, a personal accountant or attorney can usually make a referral. Carefully assess the knowledge, experience, qualifications, resources, and fees of all candidates before making any decision. Remember that life can change on a dime. The selected trustee might be a relative by marriage, die, or be too sick to attend their trustee duties. Circumstances such as these should be allowed for; for example, trusteeship can be revoked in the event of divorce, have an age stipulation, and name back-stop trustees to take the place of unavailable trustees.

Succession of a Trustee. There could be cases where even the most thoroughly vetted trustee isn’t up to par. There are also the unfortunate incidences like a trustee stealing or negligently leaving it open to disqualification and tax penalties. The trust might have a fail-safe where the grantor or a beneficiary can replace the trustee. Many trusts allow the named trustee(s) to select who succeeds them. Some might allow the trust beneficiaries to name a successor. Both approaches can be problematic. The trustee might try to sell the trusteeship. Meanwhile, beneficiaries could threaten to remove a trustee if their monetary requests aren’t indulged. Although beneficiaries may take a trustee to court for removal, this can be an expensive endeavor since the trustee can pay for their defense through the trust. To solve the conundrum, most experts recommend having a removal option available to beneficiaries, but already have successors named.

Having co-trustees helps to balance the power, but since trustees often have separate roles, even this doesn’t ensure that trustees will act in the interest of the beneficiaries. There’s also the fact that trustees have a vested interest in keeping the trust flush since fees and salaries are usually based on a percentage of the trust value. Even so, institutional trustees are often more reliable to act in the best interest of the beneficiaries since they are subject to internal, state, and federal audits and have much more to lose if sued for restitution.

Safeguards against Trustee Disasters

  • Make sure that all documents are drafted by a lawyer that specializes in trusts.
  • Ask for regular accounting reports.
  • Ask that an annual or quarterly trust report be made to beneficiaries.
  • Bond the trustee (the bonding company can be sued for restitution if a bonded trustee steals from the trust).
  • Employ an independent trust protector to mediate beneficiary and trustee discussions.
Need insurance for You, Your Family or Your Business?
We can match you to a qualified, local insurance expert!
Further Reading
Mindfulness practice has permeated many aspects of Western culture - from stress-reduction therapy to everyday business practices. Mindfulness is an approach to increasing awareness of oneself and one's surroundings. Mindfulness practice began with...
If you read our other learning management systems article in this newsletter, you know how popular the systems are becoming, especially among SMBs who are beginning to recognize the benefits an LMS can provide.  Today, there are dozens of L...
In the controversial Citizens United case, the Supreme Court ruled that corporations have rights similar to those of an individual. If follows that they have identities and are vulnerable to identity theft. Although insurance offers one way to manag...
Your business needs an employee referral system that rewards and encourages employee referrals properly. The feature story for Inc. Magazine Database May 2013 issue, discusses how social media is replacing job boards as the primary outlet for sourcin...
Do you handle ethical dilemmas within your business directly, or do you have a program for nipping such problems in the bud? Regardless of your approach, the National Alliance for Insurance Education and Research recommends asking these 12 questions ...