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How to choose a trustee

Amy Fontinelle

Posted on January 23, 2024

Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
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Lay out the responsibilities of a trustee.

Describe the qualities of an ideal trustee.

Explain the key considerations in selecting an individual or corporate trustee.
 
   

You’ve decided to set up an irrevocable trust to help protect your wealth and preserve it for your loved ones. But in exchange for these benefits, you must give up control of the assets you place in your trust and pick someone else — a trustee — to manage them.

“Designating a trustee for an irrevocable trust is a crucial decision, as this individual will manage the assets according to the trust terms,” said Nicolas Tranghese, advanced markets manager of the Planning Solutions Group of Coastal Wealth, a MassMutual firm in Fort Lauderdale, Florida.

They’ll have to follow the terms of your trust document and accept a number of responsibilities and risks. Ideally, the trustee will manage your assets as well as you have, if not better. Here are some considerations for choosing a trustee who will carry out your wishes and do right by your beneficiaries.

What are a trustee’s responsibilities?

A trustee’s most important responsibility is to act as a fiduciary. In other words, any action they take or do not take regarding the trust must be in the beneficiaries’ best interests. If the trust is meant to last for more than one generation, the trustee must also act in the best interests of future beneficiaries.

The key tasks associated with managing a trust fall under several categories.

Financial

  • Investing the trust’s principal for short-, mid-, and long-term goals.
  • Deciding when to buy and sell assets within the trust.
  • Managing the trust’s asset allocation.
  • Making distributions to beneficiaries.

Legal

  • Understanding and following trust law.
  • Following the grantor’s instructions in the trust documents.
  • Protecting trust assets from creditors.
  • Staying current with developments in trust law that could impact the trust.

Tax

  • Understanding the tax implications of distributions to beneficiaries.
  • Minimizing the trust’s tax liability.
  • Filing tax returns for the trust and maintaining records to support those returns.
  • Issuing Schedule K-1 forms to beneficiaries.

Administrative

  • Documenting how decisions were made about trust investments and distributions.
  • Reporting on the trust’s financial activity, assets, and liabilities to the trust’s beneficiaries.
  • Vetting and hiring professionals, such as investment managers, attorneys, and tax preparers, to help with specific aspects of the trust.
  • Maintaining insurance and paying property taxes for any real estate owned by the trust.
  • Mailing Crummey notices to beneficiaries when a gift has been made to the trust.1

When a trustee accepts these responsibilities, they also accept significant risks. Beneficiaries can sue, and an individual trustee can be held personally liable if the trust loses money and a judge determines that the trustee did not act appropriately.

It’s important to note that it’s irrevocable trusts where a trustee must be selected from the outset. Many people establish revocable trusts and manage them themselves, at first. But even here, eventually the time will come when the trust needs to be managed by someone else, either due to illness or death. (Related: Choosing a successor trustee)

Qualities to look for in your ideal trustee

What does it take to be a successful fiduciary? Look for these qualities when evaluating potential trustees.

  • Integrity: Your trustee should be someone who has earned your trust and whose moral compass compels them to act in the best interests of those they serve.
  • Prudence: A good candidate for trustee has a solid track record of making wise financial decisions that balance near-term and longer-term goals. “We have seen our most successful clients select someone who has strong financial acumen and trustworthiness,” Tranghese said.
  • Impartiality: Your trust may have more than one beneficiary. Your trustee should not make trust decisions that favor one beneficiary over another (beyond the extent, if any, that your trust documents specify).
  • Accountability: A trustee must keep impeccable records and be accountable to beneficiaries and tax authorities.
  • Leadership: Serving as a trustee often involves assembling and managing a team that includes legal, financial, and tax advisors. It also requires being proactive.
  • Communication: Look for someone who listens attentively, builds rapport, and answers questions candidly but respectfully. “With legal advisors, financial professionals, and beneficiaries involved, it’s important that the trustee is a good communicator so that everyone can remain on the same page as decisions of small and large magnitude are made,” said Sam Eppy, managing partner at Levanti Wealth in Fort Lauderdale, Florida.
  • Experience: An ideal trustee has knowledge of trust law and has experience overseeing a trust. They understand the unique financial requirements of managing assets that may be meant to last for multiple lifetimes.
  • Longevity: “When choosing a trustee, consider their long-term commitment and capacity, as they may need to serve for many years and uphold the trust’s integrity,” said William Bevins, a Certified Trust and Fiduciary Advisor in Franklin, Tennessee.

Choosing an individual as your trustee

If you’re thinking it might be difficult to find all of the above qualities in a single person, you’re right. Yet, a grantor’s first instinct is often to choose a relative, longtime friend, family advisor, or business partner as their trustee.

Appointing an individual as trustee has several advantages.

  • The person you want to choose likely has firsthand knowledge of your values and may also know your beneficiaries’ strengths and weaknesses.
  • Their personal connection to you can help them carry out your wishes and give you peace of mind that someone you deeply trust is in charge. A true understanding of your intentions is one of the most important qualities of a potential trustee, Tranghese said.

At the same time, this connection could make it challenging to act impartially or could taint existing relationships with beneficiaries, especially when the trust provides for discretionary distributions. Further, a trustee must accept substantial liability and could be sued by unhappy beneficiaries.

Even if everything is smooth sailing, managing a trust is a substantial time commitment — which is why the role tends to come with compensation. Still, a responsibility that at first feels like a privilege can easily become a burden, especially if the trust holds businesses that will continue to operate. Plus, not everyone knows someone they would want to select as a trustee.

The pros and cons of an institutional trustee

Banks and trust companies, also called institutional or corporate trustees, have long offered a solution to the challenges of choosing an individual trustee.

With an experienced team of professionals under an institutional umbrella, they can offer a sophisticated understanding of all aspects of trust management, including the tax and legal consequences of changing trust laws and where the trust’s assets and beneficiaries are located.

Institutional trustees, such as MassMutual Trust Company, also offer continuity. You don’t need to select multiple backup trustees in case someone dies or can’t take on the responsibility. The institution is in charge of filling all the roles needed to manage your trust. They may even be able to partner with your existing financial professional.

In addition, institutional trustees offer accountability. They know they must maintain an unblemished reputation to keep existing clients and attract new ones. And should anything go wrong, they have the resources of a large institution to resolve it.

Further, corporate trustees may have experience in managing specialty assets, such as land or artwork, and they often operate in jurisdictions that may lower your trust’s tax liability.

There can be drawbacks too.

“An institutional trustee offers professionalism and impartiality, but may lack personal insight into the grantor’s intentions and could be costlier,” Bevins said.

How to select your trustee

The right choice for you will depend on your individual circumstances and trust goals. And it doesn’t have to be either-or. Co-trustees and trust protectors can give you the best of both worlds.

“A trust protector is an optional person who can be there to oversee the trustee and make sure they do as intended,” Eppy said. “In some cases, they may even petition to remove and replace the trustee.”

For example, you could hire a corporate trustee but appoint your most responsible friend — someone you have a longstanding relationship with, who knows your family and your values — as trust protector. This role may relieve them of the potential burdens and risks of serving as trustee or co-trustee (depending on state law and the language in your trust documents).

If you do want to choose an individual for a role that requires them to act as a fiduciary, it’s important to have a candid discussion about the breadth of responsibilities they’d be accepting.

“If a potential trustee is reluctant, respect their decision and consider other candidates, as trust management is a significant responsibility,” Bevins said.

Conclusion

Selecting the right trustee is essential. It’s how you make sure that your trust serves your beneficiaries as intended.

Every grantor wants to know that their trust’s assets are in capable hands. By taking the time to make an informed decision and have deep conversations with potential candidates for managing your trust, you’ll be able to safeguard your legacy for years to come.

Discover more from MassMutual…

Wealth management: Is setting up a trust right for you?

7 situations where a trust might help

How to set up a trust

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Crummey trusts are typically vehicles used by parents to provide their children with lifetime gifts while sheltering their money from gift taxes as long as the gift's value is equal to or less than the permitted annual exclusion amount.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.