If you plan to leave significant assets to your beneficiaries, you’ve likely considered the benefits of using a trust. However, many people spend less time thinking about who they want to serve as trustee—a decision that could have crucial implications for their financial legacy.
Serving as trustee is more than an honor to be bestowed on a trusted friend or family member—it’s a fiduciary responsibility that requires tax, investment, accounting, and legal expertise. Indeed, the responsibility is so great that many attorneys advise that even if you serve as your own trustee during your working years (when you are young and can maintain control over your assets in a revocable trust), it is advisable to consider naming a successor trustee in case you decide to hand over the responsibility to someone else as you age or if you become incapacitated. Working with a corporate trustee as you near retirement or if you no longer want total responsibility for the management of the trust can help ensure that the trustee will make appropriate decisions after you pass away.
If you wish to take advantage of a corporate trustee, but still want to be involved, you could consider a co-trustee structure. Developing a working relationship with a corporate trustee now provides an opportunity for the trustee to become familiar with your trust documentation, your objectives, and your beneficiaries’ needs and personalities, and for you to provide this trustee with guidance and input and to observe how it might perform in your absence.
“As you enter retirement and face potential health issues, you may want to consider handing over the reins to a professional or a corporate trustee who possesses the skill and experience to act on your behalf for generations to come,” says Kevin Bartlett, senior vice president, Fidelity Private Wealth Management. Choosing a successor requires consideration of both personal and technical factors. As you weigh this decision, be sure to consider the following.
The trustee’s duties
The trustee’s first responsibility is to work with the trust beneficiaries to carry out the terms of the trust. The trustee must fulfill several duties during this process, each of which requires both financial expertise and personal knowledge of the grantor’s values. These trust duties generally fall into the following three broad categories:
1. Recordkeeping. The trustee is responsible for maintaining the books and records of the trust through its life, which may stretch across several generations. This ongoing task involves maintaining custody of the trust’s assets and ensuring that the trust meets its tax obligations. To this end, the trustee must have specific recordkeeping skills, including:
- Allocating between principal and income. The trustee may hire a financial services firm to keep track of assets. But it is ultimately the trustee’s responsibility to make sure that payments made from the trust’s principal and income streams are properly carried out and recorded. This task can be legally complex. For instance, some beneficiaries may be eligible to receive trust income only, while others may be able to receive only payments from principal. Moreover, rules about how assets may enter and leave a trust vary from state to state. This means that the trustee may need to possess the expertise to provide legal oversight on transactions in several jurisdictions.
- Tax preparation. The trustee is responsible for making sure the trust’s tax returns are prepared and filed in a timely manner, which includes making any necessary tax payments. Like individuals, trusts can be audited; therefore, the trustee must be conversant in both federal and state tax laws as they pertain to trusts, or must hire a tax professional who has these skills.
2. Trust administration. The trustee’s most challenging responsibility, both personally and technically, involves administering the terms of the trust. Most critically, the trustee must balance the needs of current beneficiaries with those of any future beneficiaries, such as minors or unborn children. On a day-to-day basis, the trustee must review beneficiaries’ requests for funds and decide when to approve or deny distributions.
Distribution decisions rest on the trustee’s interpretation of the trust’s terms, which may not be black and white. Say, for example, that the trust stipulates it will cover education expenses for the trust’s beneficiaries. College tuition would likely qualify under that umbrella. But what about books, room and board, or travel abroad?
“Say your sister wants the trust to pay for her kids to spend one of their undergraduate years abroad,” says Bartlett. “But your brother, who is your trustee, denies the request because his kids intend to stay in the United States. Debates about whether one beneficiary is invading a trust at the expense of the others can tear families apart.”
To settle potential disagreements, the trustee will try to determine the grantor’s original intentions. At the same time, the trustee must follow strict guidelines in rendering a final ruling, including:
- Taking into consideration how any transaction will affect future trust income, as well as gift, estate, and generation-skipping tax structures
- Communicating his or her decisions to beneficiaries, co-trustees, and other interested parties
- Ensuring compliance with applicable laws and fiduciary standards
3. Investment management. The trustee’s primary duty is to act in the best interests of the trust’s beneficiaries. At the most fundamental level, this means the trustee must actively manage the trust’s assets by establishing a well diversified asset allocation that is appropriate for the long-term needs of the beneficiaries, many of whom may be young children.
In most states, a trustee is required to follow the “prudent investor rule,” as adopted by the governing state. In general, as the fiduciary, the trustee needs to consider the needs of the trust’s beneficiaries, the provisions regarding the timing and amount of income and principal distributions, and the preservation of trust assets. Diversifying (investing in a variety of assets) is generally required as a duty for prudent fiduciary investing.
In addition to the three broad categories of recordkeeping, trust administration, and investment management, a trustee has fiduciary responsibilities that can prove both personally difficult for the trustee and divisive for the beneficiaries. These duties include the following:
- Administer the trust by its terms. The trustee has an obligation to carry out the terms of the trust as the grantor has laid them out. For example, the trustee must follow the grantor’s established distribution schedule, rather than making distributions on a different timeline.
- Deal impartially with beneficiaries. The trustee cannot favor one beneficiary over another unless the trust document allows the trustee to do so.
- Provide loyalty. The trustee is obligated to administer the trust solely in the best interests of the beneficiaries, which may mean resolving external claims. This can be difficult, as in the case of a claim from a disinherited child who may feel morally entitled to certain trust assets.
- Avoid conflicts of interest. The trustee may be prohibited from purchasing assets—such as land—held by the trust, or from taking any other action related to the trust for the trustee’s personal profit, except to the extent the grantor of the trust otherwise specifically provided in the terms of the trust.
- Make the trust’s assets productive. All trust assets must produce earnings, appreciate, or in some other way benefit the trust. If a particular asset is not productive, the trustee must dispose of it. For example, if the trust owns a vacation home that could command rent but is frequently used by family and friends for free, the trustee might be legally compelled to charge rent or sell it.
- Inform beneficiaries. The trustee is required to keep the trust’s beneficiaries reasonably informed about the trust and its administration. This duty may mean balancing the right to know against rights of privacy, such as in the case of delicate health care decisions involving experimental treatments or drug rehabilitation. In addition, the terms of some trusts—and, indeed, some state laws—mandate that the trustee provide some level of accounting to some or all the beneficiaries.
- Give notices. Generally, the trustee must notify the beneficiaries of a trust when certain important events occur: for example, a revocable trust’s becoming irrevocable, a change of trustee, a change of trustee fees, or other events set forth in the trust document. Failure to carry out these duties can result in serious consequences. A trustee could be sued, removed as trustee, or be held personally liable if the courts see sufficient evidence that the trustee has neglected his or her fiduciary responsibilities. As a result, it’s critical that you, as the trust’s grantor, pick an individual who is experienced at making these types of interpretations.
The advantages of a corporate trustee
Given the trustee’s complex responsibilities, you may wish to consider naming a corporate trustee. A corporate trustee can serve as the sole trustee of a trust, or can work with a co-trustee, perhaps a trusted family member, to make critical decisions. Consider the option of specifically assigning different responsibilities to each co-trustee. For example, the corporate trustee could be responsible for investment management and administration of the trust, while a family member could address distribution decisions.
A corporate trustee brings experience, objectivity, and professional resources to help ensure that the trust is administered according to the terms of the trust. “The primary advantage of enlisting a corporate trustee is that its sole business is to carry out the financial and legal duties associated with your trust,” explains Bartlett. A good corporate trustee will employ a disciplined and unbiased approach to the management of the trust’s assets for the benefit of current and future beneficiaries.
A corporate trustee also can help maintain family unity by taking sole responsibility for all distributions. Say that a beneficiary requests a distribution that will invade the trust’s assets at the expense of future beneficiaries—for example, in order to purchase a luxury car. A corporate trustee is positioned to weigh this request impartially, without consideration for family politics or other emotional arguments.
Finally, a corporate trustee can guarantee continuity of stewardship—a burden that an individual cannot fairly be asked to shoulder. The life of a typical trust can now average 40 years or more, according to Bartlett, and because some states have dissolved the rule against perpetuities, some individual trusts may last a century or more. Only a corporate trustee has the potential ability to manage the duties required to oversee the trust—from recordkeeping to asset management—in perpetuity.
The risks of a corporate trustee
Like all financial decisions, the choice of a corporate trustee presents risks. Chief among them involves entrusting a corporate entity with permanent powers over the management of your assets. In practice, this may mean that a corporate trustee is stricter in making distribution decisions than you might wish. To mitigate this risk, you can stipulate in the terms of the trust that your beneficiaries have the authority to replace the trustee.
A word about trustee fees
All trustees, whether they are individuals or corporate entities, are entitled to reasonable compensation for the work they perform in that role. Most corporate trustees operate under a standard fee schedule that outlines the services they will perform and the charges for those services. A trustee may charge a separate fee for trust administration, recordkeeping and investment management, or they may bundle their standard fee together.
Before naming a corporate trustee, it is essential to understand not only the services included in the standard fees, but also those services that are considered extraordinary. For example, the management of real estate may be charged for separately and in addition to the standard fees. As always, knowing when and how a trustee charges can help make for a smoother relationship in the long run.
Weigh the facts
Ultimately, the decision about whom to name as trustee revolves around how best to ensure your legacy and protect the needs of your beneficiaries. To make a wise choice, it is critical to understand the trustee’s fiduciary responsibilities. Speaking to a trusted corporate trustee who is experienced in carrying out these duties can help you determine whether an individual, corporate, or co-trustee scenario is right for you. “Be honest with yourself when you sit down to make the final decision,” advises Bartlett. “Does this individual or corporation have the skill, will, and resources to serve your beneficiaries—both now and in the future?”
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917