Reasons Why Not to Appoint an Individual as a Trustee
Most individuals fail to understand their personal financial liability as a trustee, and the long-term risks they take with every decision; accepting a role with little or no pay and unlimited liability.
When serving as trustee on behalf of a family member’s or friend’s request, many individuals aren’t prepared to make the kinds of difficult decisions that are often required of them. A lack of personal objectivity may make it difficult to serve as an unbiased gatekeeper.
Individual trustees often aren’t prepared for the time commitment associated with their role as a fiduciary. Consequently, they aren’t able to adequately administer the trust given their other time commitments; particularly when it in infringes upon their ability to earn their maximum potential income.
Most individual trustees don’t have adequate training or the educational background to serve as a knowledgeable trustee, nor have a comprehensive understanding of trust law, of state and federal tax implications, or of complex assets such as hedge funds, real estate, or a private enterprise.
Unlike corporate trustees, individual trustees usually aren’t experienced in the nuances of the trust language as detailed by trust lawyers.
Whereas corporate trustees follow a clearly defined decision-making process, individual trustees seldom have the background and experience necessary to establish a sound administration process – they simply don’t know what they don’t know.
Because they seldom document their decisions or supporting rationale, individual trustees may open themselves up to potential liability for many years.
Naming an individual as trustee presents a continuity risk because individuals may not outlast all trust beneficiaries.
Oftentimes, individual trustees don’t have the appropriate accounting and reporting tools. Additionally, they don’t know that a trust must account separately for income beneficiaries and remainder beneficiaries.
Individuals are not likely to have the proper insurance coverage to act as a trustee. Thus, in situations where an error is made, or mismanagement is determined, individual trustees do not have the resources to provide redress to beneficiaries.