The Investment Scientist

How to Pick a Trustee

Posted on: June 30, 2011

[Guest Post by Christopher Guest] I have stated numerous times in my newsletters, I am not an automatic proponent of creating trusts for people. I will tailor an estate plan for a client depending on the needs of the client. However, many times creating some form of trust is necessary. The basics of trusts can be found by clicking here. One of the most important roles in the success of a trust is the trustee. Thus, making sure that the correct person is named trustee and that the trustee understands their role, responsibilities and whether a corporate trustee should also play a role in your trust is vital to ensure the settlor’s intent.

A trust divides property into beneficial and equitable/legal titles of the property. A trustee holds the legal title to trust property for another person, called a “beneficiary.” The trustee has a “fiduciary” role with respect to the beneficiaries of the trust. A trustee’s fiduciary responsibility means the trustee must take into account the needs of both the current beneficiaries and any “remaindermen” 1 named to receive trust assets upon the death of those entitled to income or principal now. As a fiduciary, the trustee will be held to a very high standard, meaning the trustee must pay even more attention to the trust investments and disbursements than the trustee would for trustee’s own accounts.

At the outset, most clients will start off naming themselves and possible their spouse as co-trustee. Normally, this does not create an issue. But, appointing a successor trustee, or the trustee that subsequently will take over for the client-trustee upon the client’s death or incapacity, can be a concern. In a similar vein, naming a co-trustee to act in conjunction with an elderly single client could also be an issue. The client should select the most appropriate person to be named the successor trustee, or co-trustee to ensure the settlor’s intent is fulfilled.

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The question then becomes: who does the client-settlor rely on to implement the trust language into action?

Because of the important role of a trustee; there are certain overarching criteria that usually make a good trustee. Key characteristics of a good trustee are integrity and judgment. Trustees will need to weigh the importance of different competing interests of beneficiaries with different needs and trying to determine what meets the settlor’s intent. Trustees also need to be responsible, organized and mature.

Depending on the terms, a trust can last for many years, and being a trustee is a big responsibility. The person being named trustee could take on the trustee role for many years. That means a heavy burden for someone, even if that person is compensated. Overseeing a trust can consume an inordinate amount of time. The duration of the trust also might mean you do not want to name someone may pass on before become successor trustee or maybe too old to the point they do not want to deal with the hassles of being a trustee.

Another question to ask is: does naming this person as trustee makes sense as a business decision? Trustees have investing, accounting, and legal responsibilities. If the potential trustee is trustworthy but does not understand money, he or she may not be the best choice. A trustee can choose to hire professionals for these jobs. The key is whether the trustee will have good judgment in knowing when to seek professional assistance.

Overseeing a trust also requires following numerous requirements. Those requirements include: filing tax returns on time, sending notices to beneficiaries, and keeping up with changes in the law that might alter a trustee’s responsibilities. A potential trustee that does not have time to keep up with the law or hire agents to aid the trust in meeting these requirements might not be wise choice.

In short, the person named as trustee should be the person the client believes is the most responsible person in the trust creator’s circle of relatives, siblings, children or others. That person will follow through with the necessary legal requirements to oversee the trust but also most meet the settlor’s intent in establishing the trust.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

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