Choosing the right trustee is key to creating a successful trust.
First in a two-part series
The creation of trusts is an integral part of any comprehensive estate plan. While sometimes thought to be restricted only to high-net-worth individuals, trusts can provide many benefits to those with minor children, incapacitated or disabled descendents, or a spouse or children who are unfamiliar with financial management. In addition, trusts are often established for the principal purpose of reducing or eliminating estate, gift or generation-skipping transfer taxes.
A trust may be created by an individual during life or at death. A trust that is created at death may come into existence under a will or a revocable trust instrument. A trust that comes into existence during the life of the trust's creator may come into existence under a revocable trust instrument or an irrevocable trust instrument. The creator of a trust (the person who signed the document under which the trust is established and who provides the assets with which the trust is funded) under a will is referred to as "testator," and a trust under a will as a testamentary trust. The creator of the trust that comes into existence during the creator's life is usually referred to as the "grantor" or "settlor," and a trust established under a revocable trust instrument or irrevocable trust instrument is often referred to as an "inter vivos" trust. The essence of the trust requires that there always be a trustee. Even if no trustee is designated in the trust's governing instrument, a court will appoint a trustee rather than allow a trust to fail. The will or inter vivos trust instrument under which a trust is established names the trustee, as well as successor trustees, and sets forth detailed instructions with regard to how the trust property is to be administered and to or for whom, and under what circumstances, distributions are to be made. Once the trust is established, the trustee becomes holder of legal title to the trust property and is legally required to administer the trust property in accordance with the terms and conditions set out in the trust's governing instrument.
A crucial decision, but one that is often made in haste, is who shall serve as initial and successor trustees. Of course, at the outset, it must be determined whether the person (whether an individual or corporate fiduciary) has the legal capacity and the willingness to serve as trustee. If an individual is a minor under applicable state law or is mentally disabled, or a corporation is not legally authorized to administer trusts in the particular state in which the trust is being formed, that individual or corporation will not be able to accept appointment as trustee. Further, no individual or corporation can be forced to serve as a trustee. If an individual or corporation does not accept appointment as trustee, then a replacement trustee, who has the capacity and willingness to serve, will have to be appointed. Further, under most trust instruments and under the law of most states, even a trustee who has previously accepted appointment may unilaterally resign as trustee. Thus, in selecting a trustee, it is desirable not only to designate an individual or corporate fiduciary who is likely to accept and remain indefinitely in the role, but it is also wise to set forth in the trust's governing instrument a succession of trustees to serve in the event the prior named trustees are for any reason unable or unwilling to serve.
A testator or trust grantor must bear in mind that a trustee has potential liability in the serving as trustee, and not all such liability can be effectively waived in the trust's governing instrument. A trustee may be held personally liable if the trust experiences losses that result from the trustee's negligent, reckless or intentionally tortuous acts or omissions. A trustee may, in certain circumstances, seek the assistance of others (lawyers, accountants, investment advisors, etc.), but, in general, a trustee who has delegated certain duties of trust administration is not absolved of his, her or its ultimate responsibility as trustee to monitor the performance of those to whom selected duties have been delegated.
When selecting a trustee, certain qualities should be of paramount importance. An ideal trustee is honest, stable, dependable, organized and responsible. The chosen party should be one who is experienced with financial matters and has the time and energy to devote to trust administration. In addition, the trustee should have the ability and willingness to follow the terms of the governing instrument as closely as possible. The trustee should remain completely impartial when considering requests from and the positions of the beneficiaries when making investment, trust accounting, and distribution decisions.
The extent of a trustee's duties varies widely depending upon the size and composition of the trust. A trustee's primary responsibility is to interpret and implement the provisions of the trust instrument. The trustee must identify, locate, inventory, determine the values of and provide safekeeping with respect to all assets that compose the trust. If trust assets consist of property such as items of art, parcels of real estate or stock in a family business, the trustee's job can be particularly challenging. Moreover, if a person is serving as a trustee of a trust that was designed and is intended to be a substitute for a probate estate, the trustee, for a period of many months or even a few years, will be expected to perform duties analogous to those of an executor or personal representative. These duties may include marshalling assets, filing claims, filing the decedent's final federal and state income tax returns, as well as, possibly, federal and state estate tax returns, publishing notice to creditors and determining and paying the decedent's debts.
When serving as trustee of a trust that is intended to last indefinitely, among the most important fiduciary responsibilities involves the management of trust assets. Most importantly, the trustee should seek to preserve the value of trust property and, ideally, should seek to invest the trust property so that it grows at a rate that will enable the portfolio value to keep pace with inflation. A trustee must be prepared to make judgments as to when to sell and reinvest trust property. In making investment decisions, a trustee must bear in mind how much cash needs to be retained on hand for paying various obligations and taxes as they come due, as well as making distributions to beneficiaries.
The grantor of a revocable trust may, and often does, serve as initial sole trustee so long as he is alive and competent. Upon the death or becoming incapacitated of the grantor of such a trust, the trust becomes irrevocable and a successor trustee must take charge. Similarly, when the testator under a will dies, and after the period of estate administration has concluded, the trust under the will takes effect. In this event, too, an individual other than the testator must take over as trustee. For some people, the most obvious trustee candidate may be a family member or close friend. It is often thought that designating a family member or close friend as a trustee will drastically reduce trust administration expenses, because the trust will not be bearing the burden of the fees of a bank trust department or trust company. Yet, using a family member or close friend as a trustee may not be the best, or even the least expensive, option. When choosing a trustee, several factors should be considered, including the size of the trust, the types of assets to be held in the trust and the relationships between the proposed trustee and the beneficiaries.
Principally, there are two types of trustees: individual trustees and corporate trustees. Individual trustees include family members, friends and advisors. Corporate trustees include bank trust departments and trust companies. Individual trustees and corporate trustees each have their own advantages and disadvantages.
Individuals who serve as trustees generally serve on a part-time, infrequent basis. Most commonly, individual trustees are family members or close friends of the family. The distinct advantage of naming an individual trustee is that he or she often has intimate knowledge of the family's interpersonal relationships and financial position. For that reason, an individual trustee is often in a position to be very sensitive to the needs and circumstances of the trust beneficiaries as well as to respecting the values and desires of the testator or grantor. In particular, if a closely held business is likely to form a part of the trust, the individual trustee chosen may have intimate familiarity with the operations of the business (depending, of course, upon who is chosen).