Choosing a trustee may be one of the most important decisions in your estate planning. Unfortunately, it is also one of the hardest decisions to make because there are many options in one sense and very few options in another sense. Before we look at options in naming a trustee, let’s set the stage for some high level information on a trust.
Who is a trustee?
A trustee is an individual or institution named in the trust document (or will) that is charged with carrying out the terms of the trust – whether by following the explicit terms in the trust or by adhering to a combination of applicable laws. A trust is legal arrangement that allows the trustee – acting as a fiduciary – to hold the assets for the benefit of the beneficiaries.
When do trusts come into play and what is a trust?
While we will not go into detail all of the variety types of trusts and planning strategies (tax and non-tax; for an overview, click here: Types of Trusts), but a trust can come into play either during life or at death. Typically, trusts are created to hold assets for one’s heirs or beneficiaries after one’s death. The decedent desired for the assets to be protected for one reason or another; thus, the assets pass from the decedent’s estate to a trust of specified duration rather than having the assets distributed outright to the heirs at death.
The trust terms may be in a stand-alone document (e.g., revocable trust) or in a will. In both cases, the trust for the beneficiaries typically come into being at death. The trust specifies how long the trust is to last and when distributions are required or allowed to be distributed to beneficiaries. For example, the trust can last until a beneficiaries age 30, distributed in portions at ages 30, 45, and 60, and or even held in trust for multiple generations. In addition to those outright distributions, the trust generally allows for intermittent distributions to the beneficiaries based on either some specified (but perhaps flexible) standard or based on the trust income for the year.
What does a trustee do?
A trustee is first and foremost a fiduciary. The trustee, although the legal owner of the trust assets, holds the assets for the beneficiaries. As a fiduciary, the trustee has a legal obligation to both the current beneficiaries and the remaindermen, i.e., the future beneficiaries that may or may not eventually receive trust assets. If the trustee breaches his or her fiduciary duty, the trustee can be sued. While there are many legal terms on what a fiduciary means, the protections are common sense– the trustee cannot use the assets for him- or herself, must protect the assets with care, must treat the beneficiaries impartially, and must keep the beneficiaries apprised of what is going on.
A trustee’s obligations fall into three broad areas – administration, investment, and distribution. From an administrative standpoint, the trustee’s routine obligations include trust accounting (keeping track of the assets, income, and distributions), communicating with the beneficiaries about what is going on with the trust, and performing tax compliance and reporting. The investment management functions include just that – managing the investments. Of course, there are laws that help define how the trustee manages the investments. The distribution function requires the trustee to determine when and how much to make distributions to the beneficiaries. This is determined by reading the trust document while taking into consideration trust law. It is part art and part science, and clean trust drafting can be particularly helpful in this area.
Thus, the trustee arguably has relatively big duties, and this can be a time consuming chore that can last for many years. It is also quite important to ensure one’s assets are preserved and distributed in the manner that the decedent wished. Thus, choosing a trustee is quite important.
What are some options for naming a trustee?
One can choose individual trustees or corporate trustees, and the choice depends on a variety of factors including skillset, availability, complexity of the trust and situation, and pricing.
The individual can be a family member, friend, or advisor. When choosing an individual, care should be given. Above all else, an individual named as trustee must be trusted and display good judgment. Moreover, this individual needs to have the time to carry out the tasks or hire other professionals to do so. A corporate trustee – which can range from small trust companies to large, national bank’s trust departments – is generally set up to handle of these tasks in a coordinated fashion.
The fees can vary, of course, While an individual trustee may be used in a more cost-effective manner, this is not always the case as the individual will often need to hire other professionals to handle many of the trustee’s duties. The trustee is entitled to reasonable compensation under the trust terms. While it is tempting to hire a family member to reduce costs, it may be an unreasonable request to ask them to perform all of those duties for free. If they are spending time administering the trust, they are either spending less time earning income or less time on other things that matter to them.
In addition to potentially lower pricing, the benefits of hiring an individual trustee is that they – especially a family member - may know the beneficiaries more intimately and may administer the trust in closer fashion and to what the decedent desired and with more empathy. The positive of the family-member trustee knowing the beneficiary more can also be a negative. Whoever is between the beneficiary and “his or her money” can lead to conflict. Since the trustee is required to follow the terms of the trust, the trustee may have to make tough decisions on not making a distribution to the beneficiary – this may not go over well at the Thanksgiving dinner. Or, if the investments decreased in value – even if it was not the fault of the family member-trustee and merely the general conditions of the market – the beneficiary may blame the trustee and create a fissure in the relationship for years to come. (That same rationale is why my brother who is an oral surgeon refused to take out my wisdom teeth.)
A corporate trustee not only has expertise in this specific area, but there may also be other benefits to hiring a corporate trustee. A corporate trustee may have deeper pockets in case they were to breach their fiduciary, i.e., perhaps the beneficiaries can actually recover money in a lawsuit in the case of a breach. (That does seem like a strange argument, however, on the part of corporate trustees – hire us because you can recover from us when we breach our duties!) Corporate trustees often promote the idea that they are “more perpetual” than individual trustees, i.e., if the individual trustee dies or resigns, then the trust must find another individual trustee who must get up to speed on what is occurring with the trust. In contrast, a corporate trustee employs many individuals. If any individual employee within the corporate trust department passed away or left the firm, then another employee in the trust department can step in right away with more continuity. There is some truth to that in some cases, but the turnover within larger corporate trust departments and the constant reorganization of trust departments (e.g., moving to a central trust department with all new employees) makes this argument less sound.
It is true, however, that corporate trust departments can be higher fees in many cases. Because they have deep pockets, because there is usually more governance, and because they generally have to return a sizeable profit to Wall Street, the fees are usually higher with corporate trust departments – especially trust firms with expensive furniture in high rise corporate offices. A corporate trustee may charge anywhere from 1 – 2.5% of the trust assets, and many firms have minimum assets (e.g., $1 million, $10 million) or minimum fees (e.g., $5,000, $10,000). For this fee, the corporate trustee will handle everything, including tax compliance and investment management.
An alternative to the full-service corporate trustee while obtaining professional expertise is to use an individual trustee that hires out the expertise. A corporate trustee can be hired to handle just the administrative and distribution responsibilities while a fee-only financial advisor can be hired to handle the investment management tasks. The pricing is generally more flexible and may save significant sums over the life of the trust.
More recently, nimble RIA firms with trust expertise have begun to partner with a boutique trust companies that provide more focused trustee services (e.g., administrative trustee) at a potentially more reasonable cost than full-service corporate trustees while providing their investment management services to the trust. Rather than having full-service corporate trustees adhere to higher cost active management mutual funds or the expensive costs of large trust departments in high rent districts, these RIA firms may be more flexible in their pricing arrangement. At Oasis Wealth Planning, we can partner with a few select trust firms while bringing our evidenced-based investment philosophy to managing trust assets that our individual clients have come to trust. The trust department can be named as trustee while the RIA firm can be named as financial advisor in the trust document.
Flexibility and Long-Term Thinking is Key
Regardless of who you name in the trust document, it is important to look beyond the initial naming of a trustee. There may be opportunities to change the trustee either during one’s lifetime or through the terms of the trust. If the trust is created in a will or in a revocable trust and the trust has not “sprung up” because the grantor is still living, the grantor can likely change the trustee by either changing the will (through a codicil or completely redoing the will) or by modifying the revocable trust.
Moreover, if the trust has already spring up because the grantor has passed away, the trust terms should allow for the trustee to be removed and replaced under certain conditions. Moreover, it is important to consider who the successor trustees may be should the initial trustee no longer be available to serve. That should ideally be spelled out in the trust terms and as careful consideration should be given to that as the initial trustee. After all, the trust may last for many years and it is not uncommon for a new trustee to be required to be named.
The biggest risk of choosing a trustee is not taking action. It is important to get your estate planning documents drafted by a competent estate planning attorney, put some thought into naming the trustee (and personal representative or executor), and actually signing the documents. Changes can generally be made down the road, but you cannot create an estate plan after you pass away.At Oasis Wealth Planning, we have these types of conversations with our clients. If you need an advisor that provides holistic financial planning services in the Nashville area or throughout the Southeast in select markets (Atlanta, Tampa, Orlando and beyond!) or are looking for the right combination of a trustee and financial advisor, we would be happy to begin the dialogue of how we can help you and your family with your overall finances for years to come.