Trying to decide who will receive your assets and property when you pass away is one thing, and a whole other thing when choosing a trustee while you’re still alive. Finding the right trustee is crucial and such a decision cannot be taken lightly.
Most people believe handing over the trust to a family member, relative, or friend would be a good idea. However, there is a multitude of reasons why that would be inappropriate unless they are ready to take on the challenges that come along with being a trustee.
This article elaborates on the factors that you need to consider before assigning someone as your trustee. But before that, let’s familiarize ourselves with some basic definitions.
What is a Trust?
Trust is a legal contract whereby one person appoints a trustee to hold the ownership title of the property for another person(s) called beneficiaries.
There are several different types of trust but the simple one is the revocable living trust.
A living trust is where the trustee maintains and manages the trust while the owner is alive. The document would also mention a successor trustee who’ll take the previous trustee’s place if he/she passes away or is incapacitated.
Another is an irrevocable trust that appoints a trustee right from the beginning. This is the type of trust that, once created, cannot be changed or canceled.
Who Is A Trustee?
A trustee is an individual that has been given legal authority and ownership over property and assets and is responsible to carry out duties that benefit the trust and its beneficiaries. They have the legal duty to manage the trust and distribute assets to the beneficiaries as he/she sees fit.
Who Are the Beneficiaries?
Beneficiaries can be people or an institution who can receive and use the assets in the trust given by the trustee. This raises the question of whether a trustee can be a beneficiary of a trust? The answer is yes!
But they need to be extra careful so as to not take actions that would break the contract of the trust or place their personal interests and gains above the rest of the beneficiaries. In other words, trustees need to be impartial, unbiased, and loyal.
Factors to Consider When Choosing A Trustee
The trustor or the creator of the trust can decide on choosing a family member, relative, or a friend as a trustee but they also have the option of choosing corporate trustees.
Corporate trustees are basically bank departments or an institution that can be hired to build, manage and take care of your trust.
Let’s take a look at the following factors that you need to know when considering an individual or a corporate institution to manage your living trust:
An individual trustee has the responsibility of recording trust activity accounts, filing income and tax returns, maintaining properties, managing estate sales, communicating with the beneficiaries whenever needed, and so on.
Moreover, they should have the knowledge and expertise in overseeing investments and expenses and be able to report them accordingly.
The main responsibility of a trustee, however, is distributing the assets to the beneficiaries according to instructions specified in the trust. They also have to make objective decisions on which distribution can be permissible. This may prove difficult if a family member is named trustee, as he/she may struggle to make an objective decision. For instance, they may be afraid to hold back funds from irresponsible family members lest it affects their personal relationship or worse, make them appear biased.
Corporate trustees, in this case, act impartially when making decisions about the distribution of the assets. They work under fiduciary duty which means they will act in the best interests of the beneficiaries without being emotionally compromised.
2. Decision-Making Skills
Trustees should have the ability to make quick and rational decisions whenever needed. For instance, if a beneficiary turns out to be a spendthrift, the trustee can decide to withhold funds from them.
But if a beneficiary is in need of help from domestic or substance abuse, the trustee can arrange a separate home, and find a rehabilitation facility or therapy center for that person. In this case, trustees have to act and decide objectively without worrying about straining their relationship with the beneficiaries.
As already mentioned, a trustee should be impartial and unbiased when making distribution decisions. They should be of sound mind and body.
Irrespective of how close they are with a beneficiary, they need to be strict and rational when it comes to giving out funds. Otherwise, if any errors occur in judgment, the trustee is liable to pay the fines.
Some individual trustees may charge more for managing your trust. The reason being is that they need to hire lawyers, custodians, and investment and wealth managers among others to help them carry out trust-related duties. This all adds up into one trustee comprehensive fee which may be costly. Not to mention, there are income tax and capital gain taxes on your trust to think of.
Corporate trustees, however, may take a small fee but, at least income tax and capital gain taxes can be avoided.
5. Accept Liabilities
Mismanagement of the trust account, irregularities in record and bookkeeping, poor judgment on investment decisions and distribution of the assets, and mishandling or using the trust account for one’s own benefit, will all lead to a trustee being sued by the beneficiaries. This is one of the main reasons why a trustee should be unbiased and impartial when making decisions and also update the trust account information from time to time.
6. Service Time
You need to choose a trustee who’ll be available whenever the beneficiaries need to reach them. It’ll become an issue when a beneficiary calls upon the trustee but they are unresponsive for one reason or another. It’ll be an even bigger issue if the trustee is ill or not of sound mind or passed away.
When you transfer the ownership of your assets and property to the trustee, you want them to be around for a long time. However, no one knows what the future holds, so it’s only natural to name a successor trustee if something happens to the former one.
Corporate trustees, in this case, will always be available, and there won’t be an issue of them being incapacitated. Their first and foremost duty is to devote their time and resources to administering, building, and managing your trust for your beneficiaries.
Choosing a trustee can be challenging, but once you find the right one, you won’t have to worry about the management of your living trust again. Your chosen trustee for your living trust should:
- Have the ability to make objective decisions,
- Have knowledge in the financial field,
- Understand the consequences of mismanaging the trust,
- Accept the liabilities if something goes wrong,
- Be around whenever the beneficiaries call upon them
All these can be incredibly overwhelming for a family member, so when choosing a trustee, make sure they have the time and energy to administer your living trust.
In addition to all that, the one main thing you need to ensure is whether your chosen trustee is trustworthy!