We often are asked for advice regarding choice of trustees. Of course every situation is different, but here are some points to consider.
You can select an individual as a Trustee, such as a close friend or family member; or a professional can be selected, such as an attorney or CPA; or you may choose a financial institution or a bank. A good Trustee should be someone who is honest and trustworthy, because they will have a lot of power under your trust document. The person you choose to act as a Trustee should also be financially responsible, because they will be handling the investments for the benefit of your beneficiaries. The Trustee should be someone who can get along and have a good relationship with the beneficiaries of your trust. They should also possess good record-keeping abilities.
In many cases, you may want to consider appointing co-trustees. A Trustee is required to abide by the terms of a trust. If that Trustee fails to do so, a beneficiary of the trust is not without recourse. One of the benefits of naming co-trustees is that they tend to hold one another accountable. In addition, most trusts will provide a way for the beneficiaries to remove a Trustee, and replace them with the next successor trustee on the list.
It is wise to name not only your immediate successor, but subsequent successor Trustees as well. An individual Trustee may refuse to accept the position, or may resign from the position due to any number of reasons. The Trustee may become disabled or die. Many clients want family members or close friends to act as successor Trustees. But since all individuals eventually pass away, it is good practice to name a bank trust department or other corporate trustee as the final successor trustee on the list. Some clients with very high net worth, or very complex assets, may name an institutional trustee from the very beginning – either as a co-trustee with a trusted family member, or serving as the sole trustee.
One of the advantages of naming a corporate fiduciary is that they manage trusts professionally every day, and usually know what they are doing. They act very objectively to follow the instructions set forth in the trust document. They have investment experience and record-keeping skills. They know the law, and follow the prudent investor rule. If they make a mistake, they have errors and omissions insurance, so the trust beneficiaries have a source to recover any potential damages.
The primary disadvantages of a corporate trustee, however, are cost and the fact that they may not have a personal relationship with the beneficiaries. A family member acting as trustee may better understand the family dynamic, and make better discretionary decisions when it comes to your loved ones.
On the other hand, although family members will usually serve for little or no compensation, they may not be the best choice for a Trustee. While the trust may allow for some discretion, some family members are prone to make decisions on an emotional basis. Most times, the family member is not an experienced Trustee and does not know what is required of him or her under the law. If they make mistakes, they may face the wrath (and legal action) of the beneficiaries, or the beneficiaries may be unwilling to take action, and your plans and goals for the beneficiaries are not fulfilled. If you do choose a family member as a Trustee, it is best to train them for the responsibility before you die. Perhaps your attorney or advisor provides successor trustee training, or you can spend time educating them now, before they are called upon to act.
Sometimes the best solution is a combination of a professional or corporate Trustee and a family member Trustee working together as co-trustees. The family member brings knowledge of the family situation, and the corporate trustee knows how to invest and maintain records.
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