Whether updating your estate planning documents or preparing them for the first time, an important consideration is to name fiduciaries in your will or trust who will carry out your wishes. A fiduciary is a person or entity with a legal obligation to act in your best interests or those of your beneficiaries. There are several varieties of fiduciaries that serve different needs. A personal representative (or executor) is typically a short-term job that carries out the terms of your will and handles estate administration. A trustee is generally a longer-term position that can span several generations. They manage trust assets for the benefit of your beneficiaries.
Duties of a trustee
The responsibilities of the trustee include carrying out the terms of the trust, making distributions to beneficiaries according to the standards set forth in the trust, managing investments prudently, paying bills, filing tax income returns, preparing and circulating periodic statements, and generally keeping beneficiaries apprised of the status of the trust. A trustee must have a solid understanding of accounting, which allows them to keep track of both income and principal transactions. A trustee must also appropriately balance their fiduciary duty to both the current beneficiaries and remaindermen.
Who can serve as trustee
A trustee can be a non-professional individual, such as a family member or friend. They can also be a professional, such as an attorney, accountant, bank, or trust company. There are benefits and drawbacks to each option. To select the right trustee means weighing these various factors in conjunction with the goals of the trust and the needs of your beneficiaries.
Family member or friend as trustee
There are several advantages when a family member or friend serves as trustee. They are likely to be familiar with your beneficiaries and their needs, and also have a good understanding of family dynamics and your long-term wishes. Furthermore, a family member or friend will often serve as trustee without compensation.
There are also a number of potential drawbacks to this arrangement, some interpersonal and some skill-based. One of the most significant is that a personal relationship with the beneficiaries may actually hinder the trustee’s ability to remain objective and impartial in the administration of the trust. They also may need to make tough decisions that may not please all beneficiaries and a family member or friend may have a difficult time turning down a request to serve as trustee for fear of damaging the personal relationship with the beneficiary.
Although a family member or friend may have a legitimate personal interest in the beneficiaries and carrying out your wishes, they simply may not have the necessary time to devote to administering the trust properly. Beyond the time commitment, family or friends may lack the financial and technical expertise to properly administer the trust and manage its investments. A trustee can hire attorneys, investment advisers, and accountants to counsel and assist in the role, although these are expenses that will be borne by the trust.
Lastly, since trusts are often established to continue for generations, naming an individual trustee can pose a risk to the continuity of your trust since they will only be able to serve for a finite number of years. Successor trustees can be named, but there is no certainty that they will be able or willing to serve when the time comes.
The alternative to designating a family member or friend is to select a professional trustee, which could be an attorney, accountant, bank, or trust company. While having a professional trustee does add a layer of expense to the trust in the form of fees, they do offer several advantages over naming a friend or family member.
The most obvious is that professional trustees have a level of technical skill and expertise that family members or friends may lack. This includes investment management skills, legal and tax knowledge, and the ability to keep detailed records and provide accurate accountings to beneficiaries. And unlike a family member or friend who may take on the role of trustee in addition to their regular employment, it is the full-time job of a professional trustee to administer trusts, which means they have the capacity and resources to do this effectively.
Another advantage of a professional trustee is continuity. Individual trustees are only able to serve for a limited amount of time due to the realities of age and mental competence. In contrast, institutional trustees are much more likely to exist long-term, providing a sense of security and continuity in your estate plan.
Perhaps the most important advantage of a professional trustee is their objectivity. Finances can be a source of stress and balancing the competing needs of family members and different generations can be difficult. Professional trustees are often in a better position to make objective decisions in the best interests of the beneficiaries, allowing family and friends to focus on their personal relationships without the added complication of serving in a fiduciary role.