Selecting your trustee is one of the most important estate planning choices you’ll ever have to make.
While your executor’s responsibilities are limited to handling the execution of your Will, your trustee’s responsibilities may extend years or even generations into the future. And the choices they make can have far-reaching repercussions that affect all your beneficiaries in small and large ways.
Before you can even think about which specific individual you will entrust with this critical authority and obligation, you must first decide whether you will choose a family member or engage a professional trustee. There are pros and cons to both options.
Understand what you’re asking.
As you begin to consider possible trustees, it’s important to be really clear about exactly what you’re asking this person to do. Some people make the mistake of thinking that they simply need to choose someone they trust. The truth is, the complex responsibilities of a trustee require a fair amount of specific skills, knowledge, and experience. It is not a role to be taken lightly.
Being a trustee is also a role that can be quite time consuming, more so than most people assume. Depending on the nature of the estate, being a trustee can require quite a few hours, which can be hard to come by if the trustee also has a full-time job, a family, and/or other obligations.
Being a trustee also comes with a fair share of liability. Family members who act as trustees may incorrectly assume that they are exempt from any liability because they aren’t being compensated for their services, but that is not the case.
Understand the list of the tasks and responsibilities a trustee may be asked to shoulder is quite long.
Here are just a few possible items:
- Protecting and distributing assets
- Managing investments
- Safeguarding any income
- Overseeing business interests and operations
- Managing liquidity needs
- Defending and pursuing legal claims
- Valuing, maintaining, and selling/transferring real estate
- Gathering and preserving artwork, jewelry, and other valuable items
- Insuring all relevant properties and assets
- Paying debts and, when necessary, liquidating assets to fund such settlements
- Managing and ensuring cash-flow needs such as for a special needs or long-term care trust
- Resolving beneficiary disputes
- Updating and informing beneficiaries
- Determining fair division of assets
- Keeping records
- Completing and filing tax returns and paying taxes
- Paying expenses
- Interfacing with CPAs, insurance agents, attorneys, and other relevant professionals
Understand the pros and cons of family and professional trustees.
Whether you’re leaning toward selecting a family member as a trustee, or hiring a professional trustee from a law firm or financial service provider, it’s important to consider all the pros and cons before making your final decision.
Family Members as Trustees: Pros
1. Lower Costs: Family members typically volunteer to act as trustee without any financial compensation.
Caveat — This doesn’t mean there are no costs. If the trustee does not have the appropriate skills or resources, they will have to outsource services to folks who do; and these fees will need to be paid by the trust. It’s also not uncommon for a family member who initially volunteered to later—after they realize all the work that’s involved—have a change of heart and ask for compensation. Those situations can get complicated quickly, and sometimes result in lawsuits and damaged family relationships.
2. Deeper Family Knowledge: People often choose a family member as trustee as a way to “keep it in the family.” They assume that the person they select has insights into family dynamics that will enable them to anticipate issues, navigate personalities, and generally keep the peace.
Caveat — Unfortunately, such assumptions are often wishful thinking. In reality, layering a business relationship over a familial one, or even just elevating one person into a position of authority over other family members can have disastrous consequences.
3. Greater Influence Over Distributions: With one of their own at the helm of a trust, the family will likely have more sway over the nature and timing of various distributions. If everyone is on the same page and the trustee has the appropriate skills and knowledge, that can work to the family’s favor.
Caveat — If the trustee lacks expertise, but is still able to act independently, that can result in losses, missteps, and other unpleasant outcomes.
Family Member as Trustees: Cons
1. Inexperience: Serving as a fiduciary—which is what a trustee does—requires specific financial and legal knowledge and expertise. Assessing and managing investments, for instance, is not something everyone can do. Likewise, taking the reins of any business responsibilities is not something that should be done without the proper background and experience.
2. Lack of “In-house” Support: In addition to potentially lacking the right skills as an individual, a family member who is acting as a trustee will also lack the in-house support that is available to professional trustees—attorneys, portfolio managers, and so forth. Without having these kinds of supplementary team members on hand, dealing with any issues that arise can quickly become a crisis as the trustee scrambles to identify and assemble the right team to address the problem.
3. Personal Biases/Conflicts: Finally, there is the matter of a trustee having too much skin in the game. Without the benefit of objectivity, any family member trustee is at risk of making decisions based on personal biases, getting involved in inter-family conflicts and power struggles, and even being affected by undue influence applied by a beneficiary. The power dynamics at play often create rifts in previously healthy relationships.
Professional Trustee: Pros
1. Requisite Skills and Knowledge: A professional trustee is just that—professional. This person has the training and experience to not only expertly bear the inherent responsibility of managing a trust, they are also able to provide critical guidance at every juncture, giving all family members greater peace of mind.
2. Objectivity: The value of unbiased decision making cannot be overstated. Professional trustees have formal protocols that ensure objectivity, which is critically important not only in day-to-day management, but also (and especially!) when there are conflicts that need to be resolved.
3. Deep Professional Resources: Since a professional trustee is usually either part of a larger organization or partnered with one, they have fast and easy access to a broad range of supplemental resources they can call on as needed to navigate and resolve complex issues or unanticipated crises.
4. Continuity: In general, a professional trustee provides a greater guarantee of uninterrupted service. If a personal friend or family member acting as trustee is unable to perform that role, it will usually pass to a successor trustee, but finding two personal relations worthy of that kind of trust can be a tall order. A professional trustee is rarely unable to fulfill their obligations, and—if something does happen—there are typically comparable professionals with the same skills and knowledge who can step in to take over.
Professional Trustee: Cons
1. Higher Costs: Professional trustee fees can initially seem expensive when compared to having a family member act as trustee for free. But the old adage “you get what you pay for” often turns out to be an accurate commentary on such situations. Is avoiding up-front fees worth taking on the risk of a family member making inexperienced or ill-informed decisions that end up costing beneficiaries much more in lost assets or even lawsuits?
2. Lack of Family Knowledge: A professional trustee isn’t likely to have an in-depth understanding of individual family member’s personalities and behavioral traits or of the various relationships and history between family members. This can certainly put a professional trustee at a disadvantage in some circumstances, but in most cases being able to remain at arm’s length from any interpersonal entanglements winds up having a positive effect on the overall management of the trust.
3. Lack of Empathy: On a similar note, some folks might be uncomfortable with a professional trustee who—lacking any personal connections to the family—may not be as sympathetic or empathetic as a family member might be. Again, this can sometimes cause discomfort, but it can just as likely serve to provide that crucial impartiality that is so necessary when dealing with complicated questions and conflicts.
4. Loss of Control: It is unsurprising that families sometimes feel unsure about handing control of their assets to a third party. The key to putting everyone at ease is to do your due diligence when selecting a professional trustee, and ensure that the person and organization you choose is someone who will not only respect your family’s wishes, but who will also partner with you in a way that puts everyone at ease. In addition, any such engagement should be an at-will relationship that can be terminated at any time.
Make the choice that’s right for you and your family.
The important thing is to have someone in place who is ready to step in and make decisions right away. There is a lot that needs to be handled immediately. The stakes can be high, so you want someone in place who can quickly and confidently navigate through any situation.
Contact us if you need help deciding who you should choose for your trustee. And know that we serve as trustee for many Connecticut residents and would be honored to serve you as well.
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