A trust is only as good as the person selected to manage it. Choosing the right trustee — and putting fail-safes in place — is crucial to ensuring a trust’s complexities 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 familiar with the needs and circumstances of the family who will do their best to maintain the current lifestyle, but who does not have a conflict of interest from being the child’s caregiver.
Likewise, relatives are often appropriate trustees when a trust primarily holds real estate, business interests, or other assets requiring ongoing hands-on management. Many corporate fiduciaries will decline such roles because of liability. It is vital to select a trustee with a good knowledge of financial matters and the skills necessary to manage a trust.
The Downside of Relative Trustees. One common mistake is assuming trustworthiness equates to capability. A trustworthy family member may lack the experience to meet the complex legal, tax, and accounting requirements of a trust.
Even a knowledgeable family trustee can create complications in a strained family dynamic: familiarity can bring bias or hard feelings. Serving as a trustee is a significant responsibility that often requires substantial time. Many experts recommend compensating any trustee, family or professional, at least equivalent to one percent of the trust’s value.
Professional Trustees. A professional trustee can be a bank, a financial advisor, an independent trust company, or another objective financial professional. Institutional trustees commonly provide broader fiscal expertise and more time to manage trust affairs than a relative would.
Consider Trustee Insurance and other protections when evaluating institutional options.
The Downside of Professional Trustees. Professional trustees may lack personal familiarity with beneficiaries. A trust controls how and when distributions are made, often allowing consideration for factors like medical needs or education.
A professional trustee might not be aware that a beneficiary requesting additional distributions has a substance abuse problem, or they may process legitimate requests impersonally or slowly. Another downside is expense: professionals typically charge fees based on a percentage of trust assets and may bill for services. For information on professional coverage options, see Trust Fund/Trustees Professional Liability Insurance.
Why Select One Or The Other? Some downsides of relative or professional trustees can be reduced by naming co-trustees. Co-trustee arrangements can also deliver tax or legal benefits when a professional trustee is located in a jurisdiction with more favorable trust laws.
Careful Selection. All trustee candidates should be carefully vetted. A personal accountant or attorney can usually make referrals. For more information on fiduciary duties and best practices, see Understanding Fiduciary Liability and Estate Planning.
If you want help comparing options, talk to an agent about trustee choices and coverage considerations.
Succession of a Trustee. Even a thoroughly vetted trustee can fall short, or worse, act dishonestly. Trusts often include fail-safes allowing the grantor or beneficiaries to replace a trustee. Many trusts permit the named trustee(s) to select successors or name backup trustees in advance.
Each approach has pitfalls. A trustee might attempt to sell the trusteeship, or beneficiaries might threaten removal if their requests are denied. Beneficiaries can petition a court to remove a trustee, but those proceedings can be costly and the trustee may use trust funds to pay for a defense. To reduce risk, many experts recommend naming successors in advance while preserving limited removal rights for beneficiaries.
Having co-trustees helps balance authority, but separate trustee roles do not guarantee decisions will always favor beneficiaries. Trustees also have a financial interest in preserving trust assets, since fees are often percentage-based. Institutional trustees, however, may be more reliably subject to internal and external audits and regulatory oversight.
Safeguards against Trustee Disasters
- Make sure all trust documents are drafted or reviewed by a lawyer who specializes in trusts.
- Require regular accounting reports from the trustee.
- Ask that an annual or quarterly trust report be provided to beneficiaries.
- Bond the trustee so the bonding company can be sued for restitution if a bonded trustee steals from the trust.
- Consider employing an independent trust protector to mediate disputes between beneficiaries and trustees.
Frequently Asked Questions
How do I choose between a family member and a professional trustee?
Consider the trustee’s financial and administrative skills, the family dynamics, the type of assets in the trust, and the cost of professional services.
Can a trustee be removed if they act improperly?
Yes, trusts commonly include removal provisions and beneficiaries can petition a court to remove a trustee for cause.
What protections can beneficiaries use against trustee misconduct?
Common protections include bonding the trustee, requiring regular accountings, naming successor trustees, and hiring an independent trust protector.
Should trustees be paid?
Most experts recommend compensating trustees for their time and responsibilities, whether they are family members or professionals.