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Estates & Trusts

Is Your Trustee Trustworthy? Learn Why Choosing the Right Trustee Matters.

By February 21, 2018No Comments

Due to the administrative powers a trustee holds over the use and maintenance of property held in a trust, the choice of an appropriately capable trustee is an important component in trust planning. Depending on a number of factors, including the type of trust, the trustee may be the trustor, a family member or personal friend, or a professional or corporate trustee (typically CPAs or attorneys). Regardless, the trustee is legally and ethically obligated to make decisions in accordance with the trust agreement and in the best interest of all beneficiaries.

The Obligations

The trustee is obligated to act with objectivity and independence within the terms of the trust agreement. They should be capable of making well-informed decisions with the intent of accomplishing the financial and operational goals of the trust, which requires at least a rudimental understanding of the legal and operational mechanics of the trust. If their understanding falls short, the trustee should be willing to seek professional assistance as is necessary. When making administrative decisions, the trustee should take financial goals, tax implications, and the financial needs of the beneficiaries into consideration.

Challenges

Administering to a trust after the passing of a trustor can be a stressful and nuanced task. They are tasked with managing trust assets, making financial decisions, and adhering to trust documents, all while managing the expectations of the beneficiaries. If the trust documents are unclear, the trustee may be required to make difficult administrative judgements. In situations with multiple beneficiaries, the interests of one beneficiary may conflict with others, potentially creating tension and discord. The beneficiaries will look to the trustee for answers, which requires that the trustee make decisions tactfully and dispassionately while still acting in the best interests of all parties involved.

Change of Trustee

In the event that a trustee becomes unable or unwilling to act prudently in the administration of the trust, procedures for replacing a trustee are available. If the trust agreement defines such procedures, they must be followed first. If the trust agreement does not provide replacement procedures and the trustor is no longer living or capable of making such a decision, state courts may deliver judgements to initiate the process of replacing the trustee. Depending on your state of residency, it may be necessary to obtain the consent of all beneficiaries prior to amending the trust documents for a new trustee.

Family and Friends

When a trust is established, the trustor may decide to designate a trusted friend or family member to be the trustee. Friends or family members typically have a deep understanding of the family dynamic that surrounds the trust situation, are generally seen as trustworthy by the trustor, and are much less expensive than their professional counterparts. However, their ties to the family means that they lack independence, which may result in subjective decision making. The decision they make may negatively affect their relationships with beneficiaries. Finally, they may lack technical expertise in relevant areas like law, investing, and tax planning. Friends or family members are typically ideal when they are known to be trustworthy and objective, and when the cost of professionals cannot be justified.

Professionals and Corporations

A trustor may also choose to designate a professional trustee or a corporation to be the trustee of the trust. Professionals and corporations offer the benefits of being independent, making decisions logically and impartially, and preventing family relationships from suffering. Additionally, they typically have greater access to technical expertise in law, investing, and tax planning. The downsides are that they are much more expensive and, in many instances, lack a relevant understanding of the family dynamic. Professionals or corporations are typically ideal for larger, more complex trusts where professional decision making is necessary.

Regardless of which choice is made, the trustee is obligated to act with objectivity and independence within the terms of the trust agreement when making decisions relating to the financial and operational goals of the trust. When making decisions, the trustee should consider financial goals, tax implications, and the needs and expectations of the beneficiaries. The beneficiaries will look to the trustee for answers, which requires that they make decisions tactfully and dispassionately while still acting in the best interests of all parties involved.

If their knowledge or capabilities fall short, the trustee should be willing to seek professional assistance as necessary. If the trust documents are unclear, they may be required to make difficult administrative judgements. In situations with multiple beneficiaries, the interests of one beneficiary may conflict with others, potentially creating tension and discord.

Selecting an appropriate trustee to manage your trust’s operation and administration is an important and nuanced step which deserves thoughtful consideration. If you are considering establishing a trust or require assistance in managing an existing trust, please feel free to contact your L&B professional at (858) 558-9200.

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