Your estate plan must be implemented on an ongoing basis. This means that you must not only work with your attorney to choose the right trust language, you must also choose the right trustee to put that language into effect. Trustee selection is a critically important — sometimes the most important — part of the estate planning process. This chapter will discuss the responsibilities a trustee bears, what to consider when selecting a trustee who will best exercise those responsibilities, and some additional options that may add flexibility to the decision.
Assembling an Effective Team
The individuals you name to assist with your estate plan should understand that they will be acting in a fiduciary capacity. Fiduciaries are guided by two key principles — loyalty and prudence — and are charged with always working in the beneficiaries’ best interest.
A trustee is responsible for protecting and managing assets for the benefit of the beneficiaries. This complex role may change over time depending on the terms of the estate plan and the circumstances of the grantor. Many trustees also serve in the role of executor. Due to the importance of a trustee role, many plans name contingent trustees to ensure a plan is executed even if there are unforeseen events.
2. Investment manager
An investment manager consults with you to develop a diversified investment plan to include both your financial and nonfinancial assets. The plan includes appropriate asset types and classes and takes into account things that will impact the plan over time — returns, cash flow, time horizon, and tax efficiency.
An executor is tasked with settling a probate estate within the guidelines of a plan. This includes disbursing assets, selling property, paying bills, and filing and paying taxes.
An agent works at the direction of an executor in settling an estate. An agent is frequently engaged due to the emotional and financial complexity of executing an estate plan. Agents can serve as a neutral party and help meet the fiduciary requirements of the plan.
Fiduciary Duties Over the Life Cycle of Your Estate Plan
Event or situation:
If you are alive and well, you and your agent advise and implement your estate plan. You build and monitor the plan, make sure you understand trust provisions, review asset ownership, and securely store key documents.
If you are temporarily or permanently incapacitated, you pay bills, assess and coordinate care, manage assets, deal with family dynamics, and pay taxes. These can be ongoing duties that begin at the time of your death.
At the time of your death, your executor or agent settles the estate and distributes assets, coordinates final tax filings, and may also mediate any disputes.
Your legacy continues by your executor or agent managing assets, making decisions, administering trust provisions, and protecting assets. Trustees and investment managers can play a role during all of these events and situations.
Selecting a Trustee
Given the standard of care to which a trustee is held, and the sometimes difficult decisions a trustee must make, choosing the right trustee is critical to your estate plan’s success.
One process you might follow to choose a trustee would be:
- Decide what kind of distribution provisions will be in the trust. Will they be fairly objective or more subjective, requiring greater discretion on the part of the trustee? For example, a trust might allow for a beneficiary’s “support.” Does this support encompass buying the beneficiary a house or merely paying the rent?
- Decide what kind of assets the trustee will be administering. Managing a portfolio of marketable securities requires a very different skill set from that needed to manage a controlling interest in a closely held business.
What Does a Trustee Do?
Let’s say you’ve been named as a trustee for your mother’s trust. What are your responsibilities? Some of them remain constant.
In all cases, a trustee:
- Must have undivided duty of loyalty toward all the beneficiaries (no favoritism unless the trust says you can).
- Is required by state law to manage trust assets “prudently.” This means that a trustee is held to a high standard of care in managing the trust assets.
- Has administrative responsibilities, prepares and files taxes, and communicates with the beneficiaries as the trust and state law requires.
- Must make unbiased calls when deciding if discretionary distributions are to be made to a beneficiary.
Professional trustees can serve the following functions to help descendants on their journey to financial well-being and transmit those values to the next generation.
Benefits of Having a Trustee
Educating Younger Generations
Gen X and Gen Y are typically more inclined to be involved with their parents in the estate-planning process than previous generations. For millennials, trends show that:
- Nearly 60% are already saving for retirement
- About 34% carry student loan debt, with a median balance of some $20,000
- Millennials are expected to benefit financially from intergenerational wealth transfer from their parents and grandparents
Teaching About Wealth Transition
Studies have shown that teaching financial literacy early is key. On average, structured financial education begins at age 27. Yet starting earlier leads to higher confidence, with 66% of those who began before age 18 rating themselves as confident. Trusts can be used as an educational tool to:
- Discuss distribution standards for health, education, maintenance, and support
- Review alternative trust structures, such as a minor’s trust
- Create incentive trusts
Offering Support and Continuity
A highly personalized trust with very specific provisions reflecting the settlor’s intent and trust purpose can be drafted. However, it’s also critical that trustees are prepared to support future wealth recipients by partnering with other financial professionals to continue the education and wealth transition process.
Execute Your Plan
Keeping beneficiaries well-informed about your estate plan at different life stages can be accomplished through the services of a corporate fiduciary. Key benefits include regulation and oversight, availability of specialty services, objectivity, continuity across multiple generations, and asset management expertise.
Individual Trustees vs. Corporate Trustees
The decision to appoint an individual or a corporate trustee and to choose the specific trustee requires thoughtful analysis. Individual trustees may be the better choice if a particularly close relationship with the beneficiary is needed (when caring for a parent, for example) or if the trust asset requires specialized knowledge (like managing a family business).
However, a trustee’s close relationship with a beneficiary can backfire: For example, it’s not always a good idea to name one sibling as the trustee for another sibling because complex emotional ties can get in the way of objective management decisions. Individuals also might be the better choice if the trusts are of smaller value or shorter duration.
Corporate trustees often are the better choice when there isn’t a trusted individual available who can both manage trust assets effectively and make the hard decisions about when (and when not) to make distributions. Corporate trustees also are good choices when choosing an individual would lead to adverse income, gift, or estate tax results.
You should consult with your estate planning attorney for assistance in selecting the appropriate trustee for your situation.
Who Should Be in Charge of Your Estate?
It all depends on your assets. If they total less than $1 million, consider an individual trustee. However, the trustee must have specialized asset management experience. If not, consider a corporate trustee.
If your assets total more than $1 million, consider a corporate trustee. However, the trustee must have a close relationship with the beneficiary, or specialized knowledge of something such as a family business. If not, consider an individual trustee.
Regardless of the amount of your trust, if:
- there is no trusted individual
- the available individual would face adverse tax results
- the available individual would have conflicts of interest
- the trust is longer-term or multigenerational
- the trust is complex and requires additional oversight
then consider a corporate trustee.
Consult with your estate planning attorney.
Benefits of Naming a Corporate Trustee
1. Regulation and oversight
A corporate trustee’s actions are reviewed both internally by its own compliance group, and by state and federal banking regulators. Further, most courts hold corporate trustees to higher standards than individuals because they are considered professionals.
2. A broad array of services
A corporate trustee has fiduciary and investment specialists on staff as well as advisors that deal with nonfinancial assets. These professionals bring experience, which helps them identify opportunities to improve trust functions, like making certain tax elections or petitioning the court for instructions when needed.
Corporate trustees can be used to make unpopular decisions that individuals might have a harder time with, like telling a beneficiary “no” to a distribution request.
Trusts are often long-term, multigenerational structures. A corporate trustee may provide continuity of trust administration, unaffected by incapacity or death.
5. Investment management expertise
Trustee investments are governed by state statute and almost always require a “modern portfolio theory” (or “total return”) approach. Corporate trustees use this approach in a disciplined manner.
Trustee selection is a critically important — sometimes the most important — part of the estate planning process.
Are Co-Trustees a Good Idea?
A common question is whether a corporate trustee and an individual can serve together as co-trustees.
When it works well, this can be an excellent solution, combining the insight of a family member with the administrative experience and asset management expertise of a corporate trustee. To be effective, however, the co-trustee structure must be carefully considered and drafted. For instance, what happens if the co-trustees do not agree? Should there be two or three co-trustees? Should one trustee hold the deciding vote over distributions, investments, or sale of the family business? To alleviate family discord, a corporate trustee could hold the deciding vote over distributions.
Still another possibility is to name a corporate trustee as successor, in the event that an individual trustee is unwilling or unable to serve.