To Trustee or Not to Trustee

Boy, oh boy, the roles and responsibilities of a trustee are extensive. It is not the type of job you want to go into with blinders on. This article is intended to provide information about this particularly important role and some alternatives if it turns out not to be for you. In addition, if you have named an individual as a trustee, this article should either reinforce your decision or provide you with information to help you reconsider.

For those new to the world of trusts, let’s start with a definition. A trust is a separate legal entity that helps facilitate the shared stewardship of assets, ensuring they are protected, managed, and distributed according to an individual’s or family’s wishes. Trusts help advance estate planning goals in many ways, including the following:

  • When there is a blended family
  • When a family has charitable goals
  • When there is a member of the family with functional needs
  • To support asset protection and tax planning for a family business
  • When substance abuse or mental health issues are at play
  • When an heirs’ spending habits are in questions
  • To protect against lawsuits

Before diving deeply into the role of trustee, let’s familiarize ourselves with the various roles involved with a trust:

Grantor/Settlor The person(s) establishing a trust. The name for this person varies by state.
Trustee The person responsible for executing the wishes of the grantor/settlor outlined in the trust.
Investment Manager The person or organization responsible for overseeing the associated investments addressed in the trust.
Initial Beneficiary The individuals or organizations for whom assets are originally set aside.
Named/Remainder Beneficiary The back-up or secondary beneficiaries of the trust (for instance, if the initial beneficiaries are children, named beneficiaries may be grandchildren)
Trust Protector This person oversees trust administration, handles conflicts, and may have the authority to hire or fire trustees. Duties vary by state statutes and trust agreements.
Co-Trustee This person may provide continuity and support in trust administration.

Finally, there are a number of types of assets that a grantor/settlor can place into a trust. These include real estate, stocks and bonds, personal collections, and business interests. There isn’t a specific amount of assets required to have a trust. That said, a small trust will generally be easier to oversee as an individual trustee than a large trust.

There are two main types of trustees to explore in more depth. An individual trustee and a corporate trustee. Note that it is possible to have both an individual trustee and a corporate trustee in place as a co-trustee.

Individual Trustee

One of the primary reasons that individual trustees are selected is that they are familiar with family members and the family situation. This person is trusted to operate with discretion and in the best interests of the family. There are, however, several downsides to appointing an individual trustee to a large or complex trust. First, as a trustee, an individual acts as a fiduciary and is legally liable. They also have several responsibilities, some of which may fall outside of their area of comfort and capability. This includes complying with record keeping requirements, completing and filing tax documents, and overseeing the trust assets. Depending on the family situation, decisions made by the trustee may be considered biased or unfair and can create ongoing relationship issues with other family members and/or beneficiaries. Finally, if a trustee dies or becomes incapacitated, it can create legal challenges in the execution of the trust.

When a situation becomes too complex, for whatever reason, a trustee may hire one or more experts to support them, including an attorney, corporate trustee, wealth advisor, etc.

Corporate Trustee

Corporate trustees are entities such as a large bank or privately owned trust company. Corporate trustees are regulated and monitored by independent government entities. Some corporate trustees are responsible for all elements of managing a trust, including education, administration, client service, and investment management. In this arrangement, there may be an inherent conflict of interest in terms of the investment management function. Other corporate trustees are generally responsible for everything except the investment management function, which they leave to a wealth advisor and/or the individual trustee. This removes the conflict of interest described above.

Finally, as stated above, it is not uncommon for an individual trustee to have a co-trustee named. The co-trustee’s role may be played by another individual or a corporate trustee. Trusts often allow the flexibility to change co-trustees if the situation is not working out. Having a professional or corporate co-trustee, with the proper knowledge and technical skills, helps to shift liability away from the individual trustee and can create increased peace of mind.

If you are considering naming a corporate trustee in your estate plan, here are a few questions to ask to support you in the selection process:

    1. Is a client assigned a dedicated trust officer or team?
    2. How often should a client expect to meet with or speak to their trust officer?
    3. What is your approach to collaborating with an individual who is a co-trustee?
    4. Will the trustee work with my current wealth advisor?

Determining what is right for you – as a trustee or as grantor/settlor who names their trustee(s) – is a crucial step in the establishment of or updating of your trust. Take time to carefully consider all the pros and cons. Feel free to use your Stephens Wealth Management advisor as a resource to bounce ideas off, as they will typically have a good understanding of your family situation.

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