Why naming the right trustee is critical

The success of your estate plan may depend on who's left in charge.

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Key takeaways

  • Serving as trustee is a fiduciary responsibility that may require access to tax, investment, accounting, and legal expertise.
  • You may want a corporate trustee who can serve as the sole trustee of a trust or work with a co-trustee, perhaps a trusted family member.
  • To make a wise choice, it is critical to understand the trustee's fiduciary responsibilities.

If you plan to leave significant assets to your loved ones, you've likely considered the benefits of using a trust. But have you thought about who you want to manage that trust when you can no longer do so? Choosing a trustee is a decision that could have major implications for your 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 may require access to 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.

If you are nearing retirement or you no longer want total responsibility for the management of the trust, you may want to consider working with a corporate trustee: that is, a trust company or bank trust department. Working with a corporate trustee can help ensure that the trustee will make appropriate decisions after you pass away.

If you wish to take advantage of the services of a corporate trustee but still want to be involved, you could consider being co-trustees. Developing a working relationship with a corporate trustee provides an opportunity for the trustee to become familiar with your trust documentation, your objectives, and your beneficiaries’ needs and personalities. This also gives you the chance to offer guidance and input and to observe how the trustee 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," says Andrew Hamil, head of Fidelity Personal Trust Company. 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 3 broad categories:

1. Recordkeeping. The trustee is responsible for maintaining the books and records of the trust throughout its life, which may stretch across several generations. This ongoing task involves the fiduciary responsibility of taking care of the assets in the best interest of the beneficiaries with respect to decisions regarding the investment and management of the assets within the trust. 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 Hamil. "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."

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 that the trustee must ensure that the trust assets are managed in a way 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.

The advantages of a corporate trustee

Given the trustee's complex responsibilities, you may wish to consider naming a corporate trustee. A corporate trustee is typically a bank trust department or a trust company that can perform the duties of a 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.

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 Hamil. 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 Hamil, 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. Trustees 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 who 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 with 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 Hamil. "Does this individual or corporation have the skill, will, and resources to serve your beneficiaries—both now and in the future?"

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Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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