What to consider when selecting a trustee
Here's what one Fidelity professional learned from her own experience.
- ALICIA BARNHART, CFP®, EXECUTIVE PLANNING CONSULTANT AT FIDELITY
- – 09/23/2022
- Selecting a trustee is one of the most important and often overlooked decisions.
- Have an open, honest conversation with your loved ones and understand what role, if any, they want to play in helping you accomplish your estate planning goals.
- Whether you select an individual or a professional trustee, make sure you fully understand any fees that could apply, plus how they will administer the trust with discretion.
- Review your estate plan regularly, including any trusts, and especially after life events such as divorce, marriage, or the birth of new generations.
My grandparents were very independent people, and they wanted to make it simple for their children to settle their estate. When it became hard for them to maintain their home, they chose to sell it and move into an assisted living facility. As part of their estate planning, they worked with an attorney to create a revocable trust to facilitate the management of their assets on passing, and to help reduce estate taxes.
When it came time to name a successor trustee, my grandparents chose to name a corporate trustee. Their main concern was being a burden on my mom and aunt, who lived 1,500 miles away in opposite directions. They hoped a corporate trustee would take care of all the paperwork, asset management, expenses, taxes, and distributions, and that their children wouldn't need to do a thing.
Yet sadly, the distribution of my grandparents' trust wound up being the opposite of what they wanted. It was anything but simple. My mom and my aunt ended up having to take on a big role in the process, and there were unavoidable complications, delays, and frustrations. That's why I believe that everyone should carefully consider their estate plan, including the selection of trustees (if any) that they incorporate in their plan.
What went wrong
My grandfather passed away first, and their trust separated into 2 trusts: trust A, or the marital trust, and trust B, or the descendants' trust. Today, this remains an estate planning structure for families with potentially taxable estates. Typically, trust "B," which is irrevocable, is funded with assets in value that equal the available federal (or in some cases state) estate tax exemption. Trust A, or the marital trust, remains revocable while the surviving spouse is still living, and is funded with the remaining assets. The benefit of this structure is that assets in trust B are exempt from estate tax, while the assets in trust A, can be used, if necessary, for the surviving spouses' support.
Grandma passed away in 2020, at age 98. She had accounts at many firms, but no longer at the bank that she and Grandpa had named as successor trustee when they created their trust. Her daughters didn't have any contact information for the trustee, and didn't know who to call at the bank to set the process in motion. They eventually discovered that before any funds could be disbursed to pay for final expenses, such as funeral bills, all Grandma's assets had to be retitled in the name of the descendants' trust and transferred to the trustee. My mom and aunt spent many hours on the phone, figuring out how to get the right people talking to each other and the right paperwork filled out.
Corporate trustees can play a critical role in a family's estate plan. The fiduciary duties that trustees must satisfy are time consuming, and require investment, tax, and legal expertise. A corporate trustee can make impartial decisions, free of family conflicts, that seek to best serve the settlor's wishes. A corporate trustee can also offer continuity, freeing the settlor from potentially having to select a new trustee if the current one dies or otherwise can no longer perform the task. If you select a corporate trustee, it's important to communicate the relevant information to your heirs. It's possible that my family's headaches could have been avoided if my grandparents had talked to their daughters about their choice of trustee.
It also would have been a good idea for my grandparents to revisit their estate plan periodically. In the years after the trust was created, the estate tax exemption increased—for 2022, it's about $12 million per person—and there may not have been a tax benefit to having their assets in a trust.
A lesson learned
Estate plans should be reviewed regularly to ensure the plan is aligned with your current goals, keeping in mind that goals change over time. If your plan involves a trust, special attention should be paid to the terms of the trust and trustees. My suggestion would be to have an open conversation with your heirs about the decision.
I currently have a corporate trustee named for my own trust. My kids are young, and I would want the money restricted on their behalf—so an appropriate amount would go toward their education and emergencies. In my career, I've seen it many times: An 18-year-old inherits a generous sum of money and loses motivation to go to college and establish a career. It's so important to me that my kids get to experience those character-building life events. I want the money I have saved for them to give them the best opportunities, not take opportunities away from them.
But I've learned a lesson from my family's experience. As my kids get older, I will review my estate plan with my attorney to ensure that my plan evolves along with my family and any changes to estate tax laws. As part of the review process, I will discuss the various components of my plan, including the trustees that I have selected, and make sure my kids would know who to contact at the trustees' organization in the event they needed to do so.
The good news is that this experience inspired my family to do things differently. My mom and aunt have consolidated their accounts, updated their own trusts, and perhaps most importantly, had extensive conversations with their own children. That may not have been part of the legacy Grandma planned to leave, but it's one that will almost certainly offer significant benefits for the next generation.
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