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How to Choose a Trustee to Manage Your Wealth Transfer

By August 15, 2023No Comments

Trusts are a strategic way to pass significant assets to your heirs. They can ensure privacy, minimize estate taxes, provide control over how assets are distributed and more. But the effectiveness of a trust depends on naming the right trustee.

Choosing a Trustee Thoughtfully

Trustees are responsible for overseeing trusts, including investing and distributing assets. Their role is a fiduciary one, meaning they have a legal and ethical duty to act in the best interests of the beneficiaries and the trust. A competent trustee can protect beneficiaries’ interests, preserve wealth and maintain family harmony, while a bad one can mismanage distributions and lose assets. It goes without saying that a thoughtful choice of trustee is critical.

Friends, Family and a Third Option

Grantors—those who create a trust—select trustees they’re confident will carry out their wishes properly. They often name a family member or close friend. But while serving as a trustee may be considered an honor, in reality the role involves a great deal of responsibility. Most people are not aware of all the legal, tax and administrative work that is involved in trust administration. That’s why corporate trustees, such as banks and trust companies, can be a good choice.

Trustee Responsibilities

One of the core responsibilities of a trustee is the management of trust assets. This includes overseeing investments and ensuring that assets are properly protected and preserved, in many cases for the long-term needs of beneficiaries who are still minors. Another central responsibility is the proper distribution of trust assets to beneficiaries. The trustee must follow the instructions outlined in the trust document regarding the timing, amounts and conditions for distributing assets. They need to ensure fair and equitable distribution among the beneficiaries and fulfill any specific requirements or restrictions set forth in the trust.

Relying on Professionals

Recordkeeping of all financial transactions and activities is another key part of the job. Assets, income, expenses, distributions and other relevant financial information must be properly documented. And this must be done throughout the entire term of the trust, which may span multiple generations. For obvious reasons, trustees typically enlist the help of tax, investment, accounting and legal professionals.

Judgment Calls Required

The job of trustee extends beyond simply carrying out instructions, however. Trustees are often required to make judgment calls that balance the needs and wants of current and future beneficiaries. Let’s say a trust allows for discretionary distributions, and some of the beneficiaries are financially stable while others face financial hardship. The trustee may have to take these factors into account when determining the appropriate amount and timing of distributions. Naturally, beneficiaries’ emotions may become heated in such situations. Sometimes trustees have to say “no” to requests that are not in line with the purpose of the trust, and if a family member is serving as trustee, that can cause discord within the family.

The Case for Corporate Trustees

Bearing all this in mind, corporate trusteeship can be an attractive option. Corporate trustees have specialized knowledge and experience in handling the range of duties. They can provide unbiased decision-making, as they’re less likely to be swayed by family dynamics. Corporate trustees can also provide stability and continuity. They’re immune to the health issues, financial difficulties or intra-family conflicts that can sometimes prevent a noncorporate trustee from fulfilling their duties. And especially when trusteeship spans multiple generations, noncorporate successor trustees may not want or be available for the job. The institutional structure of a corporate trustee helps mitigate these risks.

Potential Downside of Corporate Trusteeship

There are potential drawbacks to using corporate trustees. For example, some grantors are concerned that a corporate trustee might be too rigid in making distribution decisions. In such cases, grantors may wish to stipulate in their trust documents that beneficiaries have the authority to replace the trustee. Or they may choose a hybrid arrangement, naming both a corporate and noncorporate trustee.

Going the Hybrid Route

One advantage of this approach is that it blends the corporate trustee’s experience with the personal touch of a family member or friend who understands the family’s dynamics and values. In a hypothetical cotrustee arrangement, the corporate trustee might ensure compliance, prudent investment management and impartial decision-making, while the noncorporate trustee advocates for beneficiaries’ interests. The hybrid approach also allows for continuity and succession planning. If the noncorporate trustee is unable to continue serving, the corporate trustee can seamlessly take over.

Don’t Wing It

Because of the importance and complexities of the role, it’s wise to use a disciplined approach to selecting a trustee or trustees. First, clearly define the qualifications you seek in a trustee. Those qualifications might include trustworthiness, financial acumen, good judgment and, most importantly, availability. If you choose a family member as sole trustee or cotrustee, make sure you sit down with that individual and outline the responsibilities to make sure he or she understands and agrees to taking on the role.

Dig Deep on Candidates

When choosing a corporate trustee, thoroughly research potential candidates. Seek recommendations from trusted advisors, attorneys and other financial professionals. Research candidates’ backgrounds, professional credentials and track records. Interview them and press them on whether they have adequate experience in managing trusts similar to yours.

When interviewing noncorporate trustee candidates, ask about their communication style, decision-making processes and willingness to work with other advisors or family members. In their responses, look for attention to detail and an ability to balance technical tasks with personal dynamics. It may be beneficial to involve an attorney or advisor experienced in estate planning to provide guidance throughout the selection process.

This article is being provided for informational and educational purposes only. It should not be construed as an individualized recommendation or personalized advice. Please contact your financial, tax, and legal professionals for more information specific to your personal situation. The information and opinions provided have been obtained from sources deemed reliable, but we make no representation regarding the accuracy or completeness of the information. 

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