Trusts are one of the most common estate planning options and are appealing for many reasons. They can enable you to identify your future wishes, hold or transfer assets for your beneficiaries, avoid probate of your assets at death and manage or reduce your estate tax liability exposure. But, they can be complicated to set up and difficult to keep updated for your lifetime planning. One of the big decisions you need to make when establishing a trust is who will act as trustee.
As the name implies, this individual or institution is expected to be reliable and responsible. But, that is just one aspect of the qualities that your trustee should possess. This blog talks about the responsibilities of the position, as well as the attributes (such as prudence, impartiality and tax knowledge) that make a good trustee. It also explains why many people choose an independent financial institution or professional advisor rather than a well-known friend or family member.
Trustee can have a mundane and significant role
Trustees have significant legal responsibilities, primarily related to administering the trust for the benefit of beneficiaries according to the terms of the trust document. The role can also require many different types of tasks. For example, even if a tax professional is engaged to prepare tax returns, the trustee is responsible for ensuring that taxes are completed, paid and filed on time.
One of the more significant trustee duties is to accurately account for investments and distributions. For example, when funds are distributed to cover a beneficiary’s education expenses, the trustee should record both the distribution and the expenses covered by it. Beneficiaries are entitled to request an accounting of the transactions of the trust at any time.
The trustee needs to invest assets of the trust reasonably, prudently and professionally for the long-term benefit of beneficiaries. Additionally, trustees must avoid conflicts of interest, including that they cannot act for personal gain while managing the trust. For instance, trustees typically cannot purchase assets from the trust. The trustee probably would prefer a lower purchase price, which would be in conflict with the best interests of the trust’s beneficiaries.
Finally, trustees must be impartial. They may need to decide between competing interests, while still acting within the terms of the trust document. An example of competing interests includes when a trust is designed to provide current income to a first beneficiary during lifetime, after which the assets pass to a second beneficiary. Although the first beneficiary would probably prefer that the trust’s assets be invested in income-producing securities, the second beneficiary would likely prefer growth investments.
Helpful qualities of a trustee
Several qualities can help make someone an effective trustee, including:
- A solid background of tax or trust law;
- Investment management experience;
- Bookkeeping knowledge and skills;
- Good reputation with integrity and honesty; and
- The ability to speak and work with all beneficiaries objectively.
Some trusts continue for generations and trustees may be needed for an extended period. For this reason, many people name a financial institution or professional advisor, rather than a friend or family member, as trustee. If the trustee may be required for a very long period, a co-trustee may be named to anticipate a transition to another trustee or a successor trustee may be required.
Naming a friend or family member as a trustee may have advantages if they are familiar with the assets and responsibilities of the trust. It may seem more efficient to use a familiar person to reduce or avoid the fees associated with an institutional trustee. However, it is important to recognize that taking on the responsibilities of a trustee still requires an investment of time, energy and expertise. Trustees spend enough time on their tasks to deserve some sort of compensation.
Even if trust documents do not provide a fee for the trustee, many states allow for a reasonable fee. Before engaging a trustee, make sure you understand what services are included in the fee. Keep in mind that it is generally not a good idea to make a decision solely to avoid paying a trustee fee.
Ask for recommendations
If you feel that none of your friends or family members are qualified to be named your trustee, ask your professional advisors, such as your attorney, accountant or insurance agent, for some help. They may either be able to serve or recommend individuals or institutions with the proper expertise and experience. The bottom line is that your planning efforts to make the trust useful and functional may be most effective if you choose the right trustee to execute the plan.