How Do You Choose a Trustee?
In choosing a trustee, the considerations are somewhat different depending on whether your trust is revocable or irrevocable. If you have a revocable trust, you will probably serve as its trustee, at least at first. But you should still name a successor trustee to serve in the event of incapacity or if the trust will continue after your death. If your trust is irrevocable, whether created for tax planning, long-term care planning, special needs planning or asset protection purposes, you may need a separate trustee from the outset.
Your main choice will be between a family member (or friend) or a professional trustee. Both have their advantages and potential disadvantages. A family member is likely to know you and your wishes better. You may feel more comfortable depending on a family member. And they probably won’t charge for their services. However, a family member also may not do a good job of investing, keeping track of expenses, and communicating with other family members and beneficiaries. They may become distracted by their own life challenges or move to another part of the country or world.
A professional trustee, such as a bank, trust company or attorney, may not know you well and may seem aloof. It will charge for its services. And it may be better or worse in terms of communication with you, family members and other beneficiaries. On the other hand, it will provide continuity, will handle investments professionally, if a bit conservatively, and will take care of all the administrative duties, including trust accountings and tax returns.
These pros and cons are not the same for everyone since both the family member and professional co-trustees available are different for each person. You may have very competent adult children who could step in and serve as your co-trustee or successor trustee as needed. And they may get along well with their siblings. You may have a close relationship with your local bank which has a good trust department or do all your banking on-line with no personal contact. Here are some of the issues you might consider in making your own choice:
- Reliability. Will your choice of trustee always be available to serve and respond to your needs and those of other beneficiaries?
- Communication. Will your trustee candidate communicate well with you and other beneficiaries?
- Burden. If considering a family-member trustee, will they be able to take on all the administrative chores of serving as trustee, including investments, annual accountings, paying bills, and filing tax returns?
- Conflicts. Conflicts can arise in two major ways. First, there can be a conflict of interest if the trustee is also a beneficiary, since distributions for or on behalf of some beneficiaries may reduce the interest of others. But conflicts can also arise if the trustee is not a beneficiary if one or more beneficiaries disagree with the trustee’s actions or decisions. Some beneficiaries may be more difficult personalities than others or the relationship between the beneficiary and the trustee may be difficult. For instance, you may not want to name one child as trustee of a special needs trust for the benefit of their sibling. It could be easier for all concerned if an independent third party served as trustee so that the siblings can simply be brother and sister (or brother and brother or sister and sister).
- Cost. In most cases, a professional trustee will, on the surface, be more expensive than a family-member trustee. Depending on the trustee and the size of the trust, the professional trustee may well charge a fee of 1.0% to 1.5% of the trust principal every year. Over time, this can add up. Nevertheless, it is usually money well-spent. It makes certain that the trust is property managed year after year. It can save the trust from poor investment and distribution decisions that can be much more costly than the fee. We have seen family-member trustees who are afraid to invest in the stock market and who missed the huge gain in stock prices after the Great Recession. In contrast, we have also seen individuals lock in the coronavirus losses by fleeing the stock market after its more recent decline, rather than riding out its ups and downs. In that setting, daily swings in stock prices can far exceed costs of any professional trustee fees.
While you cannot be totally sure how a particular trustee choice will work out, here are a few strategies for optimizing your choice:
- Testing. Name your choice or choices of successor trustee as co-trustee now, while you’re alive and healthy. This serves several purposes. You will see how your co-trustee acts in their role now and determine whether you think he or she should serve in this role on a long-term basis. By serving together, you and the trustee will get to know one another better and your co-trustee will have a better understanding of your situation, values, and goals. And if you were to become incapacitated, your co-trustee would be in place to take over management of your finances as seamlessly as possible.
- Trust Protector. Whether someone has the formal title of “trust protector” or not, make sure your trust documents gives one or more people the power to change trustees. No matter how carefully you plan, circumstances can change. Your local bank may be taken over by an international behemoth. Your trusted family member may fall ill. You need someone in place who can react to such changes.
- Co-trustees. Sometimes the best answer isn’t either/or but both—both a family-member and professional trustee. This permits the family member who may best know the beneficiaries and their needs to stay involved, but includes a professional trustee to take care of all the administrative duties and to guide the family member on standard trust practices.