Selecting the right trustee is a critical part of estate planning since the role of trustee encompasses several duties — from managing, protecting, and distributing trust assets to handling trust accounting, taxes, compliance, reporting, and communications. It takes both broad and deep expertise, and a professional trustee can be a welcome solution for many grantors and beneficiaries.
But, the selection process can be rife with misconceptions. Here are five of the most common myths we hear — and the realities.
1. "I already have an investment manager or wealth advisor who can serve as a trustee."
While there is some overlap in these roles, acting as a trustee requires a unique and learned skill set. You want a trust specialist, especially when it comes to discretionary decisions about how and when beneficiaries receive trust assets. You also want a defined process for decision-making that ensures objectivity and consistency. It's rare to find such decision-making systems and processes in place outside of trust companies.
Professional trustees also are bound by fiduciary duties — the greatest degree of legal duties one party can have to another. These duties are a hot topic among financial services professionals today, and while some move to integrate these practices into their service standards, fiduciary duties have long been the standard and are required mode of operation for dedicated trust companies.
Trust companies undergo several audits and compliance examinations annually to demonstrate robust systems of checks and balances, procedures, and controls. This protects client assets, minimizes the risk of fraud, and ensures the fiduciary process is followed.
2. "We don't need a professional trustee. My sister can do it. She knows and understands our family dynamics better than a stranger."
Perhaps, but does your sister (brother, friend) want to do it? Do they have the time to do it? Does that person have the right expertise?
Family dynamics are often a good reason not to designate a relative or close friend as a trustee.
The role is not only time-consuming; it can create awkward situations, even resentment.
A professional trustee should get to know your family and its circumstances. Particularly in cases with complicated dynamics, grantors may choose to name a family member as a trust advisor or as a co-trustee with a professional trustee to provide further insight. With their specialized experience, professional trustees often can bring new ideas to the table to help resolve difficult issues. A joint approach such as this can be an ideal solution for many families.
3. "Hiring a professional trustee sounds expensive."
It's exceptionally rare for individual trustees to carry out their obligations without support from multiple professionals — an attorney, accountant, investment manager, and others. That support doesn't come free. Professional trustees typically require less of this support; when they do need it, some of these services often are included in the professional trustee’s fee, or professional trustees are able to access these services more efficiently and therefore at a lower cost to the trust.
4. "A cookie-cutter approach won't work for our family's unusual assets. And, we don't want to be locked into a relationship that's not working."
Dedicated trust companies typically take a tailored approach to each family's needs, communication styles, and to facilitating the grantor's wishes as expressed in the trust document. A professional trustee can manage and protect all types of assets — residential and commercial real estate, operating and nonoperating business entities, receivables, alternative investments, farmland, oil and gas interests, and more.
Most trust documents drafted over the past 10 to 20 years offer plenty of flexibility as to who can appoint and remove a trustee. Families also can opt for "agent for trustee" services, an arrangement in which an individual trustee hires the trust company to carry out the administrative responsibilities, but the individual trustee retains control and authority.
5. "What if our professional trustee quits their job? We want continuity."
If an individual trustee abdicates the role for any reason, families can be left with an outdated list of successor trustees, scrambling to find a suitable new trustee, or in rare cases, to have one appointed by a judge. Dedicated trust companies tend to have low turnover, and often work in teams. If one trust officer leaves, other team members remain and ease the transition to the new officer.
6. "Anyone can make a good first impression; I'm not sure how to assess a professional trustee's approach and experience."
Interview prospective trust companies and trustees. Look for a holistic wealth management skill set, including technical depth when it comes to income and estate taxes. This helps ensure tax efficiency, so more money stays in your family.
A trustee requires a unique skill set. You want a specialist, especially when it comes to making discretionary decisions about how and when beneficiaries receive trust assets. This needs to be done in accordance with the expressed terms of the trust and the trust professional’s knowledge and experience with the other myriad of variables to consider.
Ask prospective trust companies about client service. Although trust-only companies are regulated like banks, they're not deposit institutions, and they don't have incentives to sell you CDs or loans, for example. Trust companies tend to act more as consultants, so you should expect a high degree of personalized service.
Ask about the decision-making process. When a beneficiary has a request, what variables will the trustee consider? Is there a trust committee? Who participates? If you have special circumstances, such as a special-needs child or a family business issue, how would the trustee handle them? There should be clear answers to these questions with a thorough discussion, not "Well, it depends."
Ask how the trustee views their role. While the trustee has legal title of ownership to trust assets, their role is to manage, protect, and distribute the assets according to the grantor's wishes and to serve the beneficiaries, not retain the assets (unless that was the grantor's wish). Is the trustee's organization in the business of keeping assets on deposit for their own benefit, or does it see itself as a facilitator for the family’s benefit?
Don't fall prey to common misconceptions. Understanding the reality and asking the right questions can bring peace of mind when it comes to safeguarding your family's assets and meeting its ever-changing needs.