Choosing a Trustee to oversee a beneficiary’s inheritance following your death is an important estate planning decision. This article discusses the main factors to consider in selecting Trustees and other important fiduciary roles.
A Trustee is a fiduciary who oversees assets held in trust for the benefit of one or more beneficiaries. A “fiduciary” is a person or organization that acts on behalf of another person to manage assets. Fiduciaries are bound by ethical duties, including the duties of good faith and loyalty. Here are the main qualities to consider in selecting a Trustee:
1.) A Trustee Should Be Organized and Detail-Oriented
Serving as Trustee involves overseeing trust investments, communicating regularly with beneficiaries, providing detailed accountings showing how trust funds have been allocated and spent, filing tax returns, and exercising discretion when a beneficiary requests a distribution that is permissible (but not necessarily mandated by the terms of the trust). Thus it is imperative that the Trustee has impeccable recordkeeping and organizational skills.
2.) A Trustee Should Be Honest and Loyal
A fundamental duty of the Trustee is that he or she must administer the trust solely in the interests of the beneficiaries. Importantly, the Trustee must be adept at identifying potential conflicts of interest and avoid the same at all costs. Choose a Trustee who is above all else, honest and transparent.
3.) A Trustee Should Be Financially Stable
The ideal Trustee is, at minimum, financially literate, but ideally, financially savvy. Never choose someone as Trustee who has a messy financial history or creditor issues, which could jeopardize his or her ability to administer the trust prudently and avoid conflicts of interest.
4.) A Trustee Should Be Emotionally Stable
The ideal Trustee is emotionally stable, reliable, and composed. Often, particularly with respect to beneficiaries who have addiction or spendthrift issues, the Trustee will encounter backlash if a beneficiary’s request for funds is denied (or approved but with restrictions the beneficiary does not like). The Trustee should be capable of standing up against difficult personalities while at the same time remaining calm and professional under pressure.
5.) A Trustee Should Be Emotionally Intelligent
Going one step further, a Trustee also should be emotionally intelligent. Emotional intelligence or “EQ” is the capacity to be aware of, control, and express one’s emotions, and to handle interpersonal relationships judiciously and empathetically.
6.) A Trustee Should Remain Impartial
If a trust has two or more beneficiaries, the Trustee has a duty to act impartially in investing, managing, and distributing trust property. In other words, the Trustee is not allowed to play favorites. This is especially important to consider when nominating a family member to serve as Trustee for other family members.
7.) A Trustee Should Be Available
Naming an individual who has all of the qualities described in this list as Trustee will not do any good if the individual is not available to serve in the role. For example, I’ve heard clients say, “My son is a successful stockbroker on Wall Street; he would be the perfect Trustee.” Maybe, but maybe not – depending on whether he has the time and availability to serve as Trustee in the first place. Similarly, I’ve heard, “My daughter is an incredibly intelligent physician; she would be the perfect Trustee.” In reality, she is probably overwhelmed with running her practice; also, intelligence in one area, such as medicine, does not necessarily translate to the emotional intelligence and financial savvy required to serve as an effective Trustee.
8.) A Trustee Should Be Willing to Seek Help When Needed
An individual Trustee should not be expected to fly solo; rather, the ideal Trustee is able to identify personal strengths and weaknesses and seek help when needed. For example, it is common for Trustees to employ “helpers,” such as attorneys, CPAs, accountants, and investment advisors, to guide them in fulfilling their fiduciary duties. Thus you should choose a Trustee who is not afraid to seek the expertise of professionals when appropriate.
For some clients, choosing an individual family member to serve as Trustee may offer advantages, particularly when the family member is familiar with family dynamics and values, has experience in law and finance, and may be willing to serve as Trustee for a discounted rate. On the other hand, choosing one family member as Trustee over another can enhance family discord and the perception of favoritism, particularly among siblings. In such a case, it may be more appropriate to choose a corporate fiduciary, such as a bank or trust company, to serve as Trustee. For example, a corporate fiduciary may be an ideal solution in a blended family situation, when there is known acrimony among beneficiaries, when the trust is expected to last for many generations, or when the estate contains complex assets, such as a closely held business.
A frequent initial objection to naming a corporate fiduciary as Trustee is the expense involved. Yes, it’s true that corporate fiduciaries are entitled to be paid for serving as Trustee, but so is Uncle Tony. Whereas the corporate fiduciary is experienced and heavily regulated, Uncle Tony likely is neither. Ultimately, if you are considering using a corporate fiduciary as Trustee, it is important to review the company’s fee schedule and find out if there is a minimum financial requirement. For example, many corporate fiduciaries require $1 million in assets under management to serve as Trustee.
In some cases, I recommend a combination approach. For example, if there is a family member who has an affinity or special way of dealing with an otherwise difficult beneficiary, and the family member is honest and loyal, but not necessarily financially savvy, consider naming the family member to serve as Co-Trustee with a corporate fiduciary. The individual Co-Trustee will manage the expectations and emotional volatility of the beneficiary and communicate the beneficiary’s needs to the corporate Co-Trustee, while the corporate Co-Trustee will ensure that investments are allocated properly and legal notices, accountings, and tax returns are filed on time. This combination approach can be a win-win for all involved.