When setting up a trust, it pays to be thorough. Most people who may have an interest in setting up a trust for their estate understand that a successfully developed and implemented living trust can often be the difference between a smooth inheritance process, and unnecessary consequences.
Part of every trust is eventually deciding whose responsibility it will be to oversee the proper execution of the trust after your passing. Trusts, living or otherwise, are meant to do their best work when you are no longer in the picture. But they do not take care of themselves, unfortunately. A human element is crucial for a trust to be useful – and to that extent, it is important to choose the right person.
However, choosing the right trustee for your estate is no simple matter. A trustee is more than just an honorary title – it is a job, with numerous responsibilities and, depending on the size and complexity of the estate, it may require various competences from knowledge of local estate and probate laws, accounting skills, administrative capabilities, and more.
Before we delve into what a trustee does, it is time to discuss what trusts do. In its simplest form, a trust is a written and ratified agreement between several individuals to aid in the transfer of assets and property from one person (a grantor) to another (the beneficiaries) after death. When such a trust is drafted and created, the resulting trust entity takes temporary ownership over all assets and properties funded into the trust. A third party is needed to oversee this process (the trustee).
To this extent, while the grantor of the trust is still alive, nothing happens to the grantor’s ability to control the assets within the trust. While they belong to the trust rather than the grantor, they are functionally still within the grantor’s possession, and they are legally still a part of the grantor’s total estate (for tax purposes).
Once the grantor has passed away, a successor trustee is appointed to manage the contents of the trust and resolve it over the course of the inheritance process, until it is fully distributed between its various beneficiaries. Some trusts are resolved faster than others – some trusts can exist for years, with the express purpose of supporting an individual who struggles with financial responsibility without exposing them to the consequences of a massive single-sum inheritance. Other trusts exist to ensure that a portion of an estate goes towards certain charities, and these are resolved quickly.
Trustees must reserve impartiality, act solely in the interest of the trust’s designated beneficiaries, and they must properly manage all trust assets to preserve their value and integrity. To do so, trustees are free to use the trust’s funds, but must do so prudently, with absolutely no intention of self-dealing. A trustee must be capable, with a strong sense of integrity, and total awareness of their moral and fiduciary responsibility to honor the grantor’s wishes and carry out the trust.
Regardless of how a trust is structured, it is the trustee’s job to make sure the trust is resolved as planned by the grantor. Special instructions are usually given to trustees before the grantor passes away, and in most cases, trustees are informed of their future responsibilities and the full extent of their required capabilities long before a grantor is ready to leave this world.
When a person dies, they usually do not leave behind a will, let alone a more complex set of estate planning measures. In these cases, it is up to the courts to decide who will administrate and execute the estate, a task usually given to the parent, spouse, or oldest child of the deceased. Yet when one has the foresight to choose their own trustee, it is acceptable – and even recommended – to be picky.
Regardless of who you choose, any and every trustee shares the same set of responsibilities. As such, a trustee should be chosen based on both trust as well as competence. Can you be sure that any relative you choose will be capable of carrying out the necessary tasks to manage and resolve the trust? Do you trust them to manage the funds properly and remain impartial? Do they exercise good judgment financially?
Choosing someone from within the family means choosing someone who is more likely to know what each beneficiary needs, and how best to manage the transfer of assets. But choosing someone inexperienced opens the door to them being liable for major damages out of ignorance.
Trusts need not be managed by family and friends. Financial advisers and estate planning attorneys are often more capable, but lack the experience necessary to understand each client’s family, and unless a trust is structured to prevent it, it can be difficult for beneficiaries to take legal action against a trustee should they not do their jobs properly.
Finally, cost is another matter. An attorney or accountant with trustee experience will charge for their services, and some charge more than others. It is also unwise to appoint your family’s estate planning lawyer as trustee, due to the potential for a conflict of interest.
The third and final option in most cases is the corporate trustee. This is usually a bank or specialized trust company. Corporate trustees may charge less than an experienced attorney, but there are other problems to consider, including potentially lower quality service and administrators that are neither as experienced as some estate planning attorneys, nor capable of the same level of nuance regarding family matters as a trustee from the family. While corporate trustees have policies in place to avoid any abuse of power, and openly declare their fees (often negotiable), one must weigh these benefits against the potential cons.
Choosing the right trustee is critical, but there are many factors that determine the right choice in any given case.
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