Choosing The Right Trustee

By: Randall A. Denha, J.D., LL.M.

Picking a trustee gets less attention than choosing your new smartphone.  In the first place, it is not a fun moment.  You and/or maybe your spouse are sitting with your estate planning lawyer.  You are planning what happens when you pass away.    For engineers and math people this is a logical emotional process.  For everyone else it is a winding road of emotions and what-ifs.  To sum up, in your Will or separate trusts you have to pick a few positions.  In your Will you need to pick an Executor, Guardian (if you have kids), Beneficiary and a Trustee.  If you have a revocable or irrevocable trust you will need to pick a Trustee and Beneficiary.  In short, picking a trustee is really important.  The trustee controls everything.

A trustee follows the rules of the trust document.  A trust document creation occurs in your Will when you pass away and/or in a separate trust document while you are alive.  In any event, picking a trustee is a must.  A trustee has a ton of power such as:

• how much and when people get money from the trust
• permitted investments in the trust
• protect trust assets from bad people
• other complex trust accounting and administration rules

As the name goes, the trustee should be trustworthy. If you cannot trust the individual to hold money for you, you should not name him as trustee. If your cousin makes a living day trading, steer clear of him. And if your sister-in-law lives paycheck to paycheck, let’s bypass her, too.

If you choose a family member or friend, he should be financially astute, and good with money. You want someone who is, at a minimum, familiar with basic concepts of investing, and preferably someone who has assets of their own that they are investing with an investment advisor. Your sister does not have to be a financial guru, but she should be smart enough to know that she cannot directly invest the money herself. As trustee, she will hire an investment advisor to invest the trust assets, or work with your current investment advisor.

You have two options for picking a trustee – an individual person or a trust company.  There is not a perfect trustee answer.  So without delay, a few big differences between a person and a trust company as trustee are as follows:

• An individual person normally does not charge a fee as the trustee, but is within their legal right to do so.  A trust company charges a fee every time.  In that case, individual person makes better choices. Cost conscious clients see this as a plus, but it may not be the best decision. Your family may be better served with a professional trustee or trust company who have expertise with trust administration.
• A person can steal trust assets.  A trust company has huge checks and balances and insurance.
• A person can play favorites with beneficiaries.  A trust company legally cannot. Another disadvantage is that your family member may be too close to the family and may get caught up in the drama. Or, he may have a power trip and enjoy being in control of your beneficiary’s finances. You may want someone with a little more distance who will see your beneficiaries with a fresh set of eyes and treat them equally.
• A person will age and get sloppy with the trust rules.  A trust company never ages.
• Trust rules, taxes and the legal landscape often change.  A person’s focus is not on those changes. A trust company’s focus is on those changes.
• Most people do not manage money well.  Some trust companies do well at that and some not so well. The majority of corporate trustees do manage the investment assets of the trust. In the end, who do you want managing the trust assets – independent financial advisor or a trust company? We believe people want the flexibility and freedom of a picking who manages the investment assets of a trust such as a financial advisor.

What about naming your lawyer or accountant as the Trustee?  The advantages of a lawyer or an accountant serving is that they have familiarity with your family if you have worked together for a long time. While they will often charge more than a friend or family member, they typically charge less than a trust company or corporate trustee. Lawyers and accountants generally charge their hourly rate for the time they spend serving as trustee. A disadvantage is that they may not have the same institutional structure that a trust company will have. This can also be a plus if you prefer a trustee with more flexibility than an institutional trustee.

What about naming a corporate Trustee?  Trust companies bring structure and oversight to the trust administration including a trust department that oversees the administration. You will pay for these services, but it may be money well spent. They will make the tough decisions and tell beneficiaries “no” when appropriate. It is often advantageous to use a trust company when the beneficiaries do not get along, when there is a problem beneficiary, or when you are dealing with large sums of money.  Unless the trust is properly drafted, a drawback to a trust company is that they may be hard to remove or become inflexible. They also may be tightfisted in making distributions if it will reduce the assets under management that they are investing. These concerns can be addressed by giving a neutral third party, such as a trusted family member or advisor, the ability to remove and replace the trustee.

What happens if you name an individual trustee to the trust fund and then he or she dies? It is for this reason that many individuals and families opt for a corporate trustee. That way, there is not only the oversight and services that can be brought by a financial institution but some relative peace of mind as well. If the bank-appointed representative dies or is incapacitated, the bank can put another representative in place quickly. There shouldn’t be any lengthy court hearings or potential snags.

As an added bonus, using an institutional trustee can help protect your assets from malfeasance. A scenario might help you understand the reasons: Imagine you use a friend as a trustee, and he develops a gambling problem, stealing the trust assets. Sure he’s going to go to jail, but that doesn’t do any good for your beneficiaries. The cash is still gone. If, however, you had appointed a corporate trustee they have internal audit procedures and safeguards that would prevent such a theft from occurring. Moreover, if it did occur, you would have a claim against them (and their deep pockets), offering hope of recovery.

One way to get the best of both worlds is to appoint your friend and the bank as co-trustees, who have to work in concert together on major decisions. That way, you know someone who is looking out for your intentions, but you have the safeguards and watchful eye of a major financial institution to keep him or her honest (and vice versa).