Estate Planning Basics, Part 2: The Perfect Trustee
This is Part 2 in a two-part series regarding wills and trusts in estate planning. For an introduction into the differences between trust and will, please take a moment to read Estate Planning Basics, Part 1: Trust vs Will—Which One is Best?
Named Positionsin Your Estate Planning
When preparing your will or trusts, you need to fill a few important positions. In your will, you need to pick an executor, guardian (if you have kids), and trustee. If you have a revocable or irrevocable trust, you will also need to pick a trustee. These roles are crucial to handling your estate properly for your beneficiaries. If you have both a will and trust (as I recommend- see Estate Planning Basics, Part 1: Trust vs Will, Which One is Best? ), you will name all of the above roles.
Most people name themselves as trustees during their lifetime and name a successor trustee to take over when they are unable to manage things on their own. A successor trustee is a person (or corporation) who will take charge of your trust assets after your death, or sooner if you become incapacitated and unable to manage things. Your successor trustee has a lot of responsibility and will act without court supervision, so choosing a successor trustee is an important decision. The decision should not be taken lightly.
Successor trustees can be your adult child(ren), other relatives, a trusted friend, or even a corporate trustee. If you choose an individual, you should name more than one (preferably three). This way, if your first choice is unable to act, the next one can step into the role. Your trustees should be people you know and trust, people whose judgment you respect and who will respect your wishes. If your trust is a simple trust designed to distribute your assets directly to your beneficiaries after death, a competent and diligent family member or friend is usually fine. If your trust is designed to keep assets within the trust for an extended period, then you need to decide whether your beneficiaries will be the trustees of their own trust or whether a family, friend or corporation will act as the trustee.
There are pros and cons to all choices. While it’s common to choose family members or friends, there are a number of issues to consider for this. Your choice will depend on:
- The terms of your trust document and what your trustee will be expected to do, and for how long;
- your family situation and any conflict that might be created or averted;
- What’s important to you.
Two Different Hats for your Trustee
Remember, there are potentially two different roles here for your trustee, and each will require a different set of duties and skills. The first has to do with handling your affairs in the event of your death and the second has to do with handling your affairs in the event of incapacitation–prior to death but when you can’t take care of yourself.
After your death:
A simple, revocable trust designed to distribute assets directly to beneficiaries will require your trustee to identify assets, pay bills,and distribute the assets to your beneficiaries. It is often a straightforward job with a limited duration and can usually be handled by a competent family member or friend. In a more complex trust situation, which includes keeping assets in trust for your beneficiaries, your successor’s responsibilities will be greater and last for a longer period of time.
If you become incapacitated, your successor trustee will step in and take full control of your financial situation, including paying your bills, making financial decisions, and even selling or refinancing real estate. This role could continue for a very long time and your trustee could be faced with making many financial decisions on your behalf. It’s a job that requires commitment and time as well as some business sense. Your successor will be able to do anything you could do with your trust assets, as long as it does not conflict with the instructions in your trust document and does not breach fiduciary duty. It is a wide-reaching role and will be done in private and without court supervision (this is one of the reasons you have a trust, to begin with), so your trustee needs are different in this case.
Which hat will your trustee be called on to wear? The answer isn’t known now, but your choice of trustee(s) should consider both roles.
Considerations for Trustee Selection:
Here are some considerations when choosing individuals or corporations for these roles:
- Naming your spouse: Is your spouse up to the task, especially if you’ve become incapacitated? Grief or worry may affect your spouse’s ability to handle certain issues, especially if he/she is needed to handle incapacitation.
- Naming adult children: If you have more than one child, which one should you name or should you name more than one trustee? Do your children get along or will there be conflict? The child or children you choose as a trustee or trustees needs to be honest, detail-oriented, fair, good communicators, and have the needed time to take on the necessary tasks.
- Naming a family member/good friend: No outsider will understand your family the way a close family member or friend does. Your trustee should be someone with tact, sensitivity, and good judgement.
- Co-trustees: sometimes it makes sense to have more than one person act in this role. Having co-trustees can help or hinder, depending on your circumstances. Co-trustees could be a family member and a corporate trustee.
- Time and expertise: The person you choose doesn’t need to be a financial expert, but should have a basic business sense and must be able to find good, honest advisers to help with investments, taxes, and other matters.A trustee role can take a substantial amount of time and those with demanding careers and family may not be up to the task.
- Willingness: Is your desired trustee willing to serve? Be sure to ask the person(s). Don’t simply assume your best friend would want to take on the role of managing your financial affairs and health care decisions.
- Compensation: Trustees should be paid for their work. You want people to serve willingly and also be compensated for their time. Your trust document should provide for fair and reasonable compensation.
Making the case for a corporate trustee:
There are times when it makes sense to consider a corporate trustee. Many people dismiss this option as expensive and impersonal, but it might be to everyone’s benefit.
Some revocable living trusts are complex or may be designed to benefit heirs for many years to come. If you anticipate that your trust will endure for many years, consider choosing a corporate fiduciary (a trusted company or bank) to serve as your trustee. These institutions are equipped to provide long-term administration, and they generally offer high levels of accountability and oversight. In addition, corporate fiduciaries are competent to handle finances and keep detailed records. They also avoid family conflict, providing unbiased and unemotional decision-making. The fees are often a reasonable expense for the value provided.
Choose Wisely: Your Estate Planning is a Love Letter to Your Family:
While it may be true that a perfect trustee situation may not exist, your ideal trustee is one who will handle your affairs with competence, good judgment, and objectivity, so that you can establish your legacy for years to come. Your estate planning is but a chapter in your life’s story and when done well, it can be a real and tangible way to write a love letter to your family. Spend the time to explore your options and choose wisely based on your family’s unique circumstances.
Do you want a decision-making partner now who will help you align your goals and financial decisions in estate planning along with the other important financial areas? This is exactly what we do. We help clients invest appropriately, reduce taxes, and retire smartly. This includes ensuring your estate planning documents are clear, concise, and in line with your wishes.
*Note: Neither Scheibel Planning Solutions nor Cambridge provides tax or legal advice.
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