Choosing an appropriate trustee is one of the most important, and difficult, decisions individuals face when forming a trust. Students of history (and those of a certain age) likely recall how both former presidents Gerald Ford and Harry S. Truman often were referred to as “accidental presidents,” since both men assumed the role without really seeking or preparing for the office. Individuals appointed as trustee often find themselves in a similar situation when selected to fulfill a role they neither sought out nor prepared for.
Selecting a trustee, or serving as one if selected, raises a number of challenges for many families — not the least of which include changing circumstances, family dynamics, and succession plans as current trustees age out of the role. Many families, however, aren’t aware of the options that exist for support and guidance.
Understanding the job: Trustee roles and responsibilities
Prior to selecting a trustee, the grantor along with their attorney, other advisors, and family members must ensure the trustee has the skills — and the available amount of time — to execute the primary trustee responsibilities, including the following activities:
- Administer the trust properly.
- Ensure compliance with trust provisions and other legal requirements.
- Provide regular communication, education, and accountings to appropriate beneficiaries.
- Keep an inventory and value of trust assets.
- Protect and manage personal assets, such as a vacation home.
- Ensure the 1041 trust tax return is completed and filed in a timely manner.
- Prepare annual statutory principal and income accounting.
- Provide investment oversight.
- Select and monitor investments or partner with an investment advisory firm.
- Develop an investment policy statement that’s consistent with the purpose of the trust.
- Handle special assets such as real estate, partnerships, private equity, and family-owned businesses.
- Minimize tax ramifications.
- Coordinate trust distributions.
- Calculate and disburse income and other required distributions.
- Manage income and principal cash using discretion to distribute funds appropriately and fairly.
- Act in an ethical and unbiased manner toward all parties involved.
- Be cognizant of the sensitive and financial needs of beneficiaries.
- Dedicate the necessary time to the trust’s oversight and management.
- Manage the trust as efficiently as possible.
- Commit to the role for the long term to minimize disruption and inefficiencies.
- Safeguard the assets with the appropriate custodian, insurance, internal controls, cybersecurity, and independent audit, as appropriate.
You can see it’s a lengthy list, and often the individuals selected have the best of intentions but don’t in fact have the requisite skills. In these situations, families have several paths forward.
Trustee options: Factors to consider
Corporate trustees often are chosen by a family because of the complexities of the trust, the amount of time required in the trustee role, and the special skills needed in investments, taxes, bookkeeping, cash management, and compliance. Corporate trustees work in a bank or trust company that’s either federally or state-regulated and staffed by individuals who specialize in trust administration.
Selecting a trustee, or serving as one if selected, raises a number of challenges for many families.
A corporate trustee may be the right solution for many families, particularly those that don’t have individual trustee alternatives or need a professional to manage difficult family dynamics, for example. Corporate trustees are usually less flexible than individuals and may not understand the family business or dynamics to the same extent as a trusted advisor or family member.
An individual trustee — usually a business partner, close friend, attorney, accountant, or family member — can be named to act as trustee over some of the family wealth. Both often have intimate knowledge of the family dynamics and unique assets. However, the individual may lack the time, resources, and expertise to manage this wealth appropriately.
An individual family member is usually the “family spokesperson” and could be an uncle, aunt, or other relative who is the most business and financially savvy.
An agent for the trustee can reduce the amount of time the individual trustee would otherwise spend on trust matters by as much as 90%.
Most individual trustees who need help serving in the role opt to outsource some of the work to their CPA and lawyer — or another professional organization that specializes in agent-for-trustee services.
Agent for individual trustee
An agent for the individual trustee role involves outsourcing administrative function and trustee guidance to a specialist in the area of trust administration. The agent for trustee should be a professional organization that can also be a corporate trustee if necessary. The individual trustee still retains the power and fiduciary duty and serves as if they were the CEO or chairman of the trust. The agent for the trustee handles the day-to-day administration of the family wealth, manages or provides guidance over a single or multiple investment advisor solutions, and discusses and educates the trustees on how best to formalize distribution decisions.
Appointing an agent for the trustee often is a good, flexible long-term solution, especially during the transition of individual trustees. The agent for trustee is still a professional fiduciary to the trustees but isn’t a decision-maker for the trust. Rather, the agent is an advisor who can guide the individual trustees to make informed, expert-based decisions. An agent for the trustee can reduce the amount of time the individual trustee would otherwise spend on trust matters by as much as 90%.
For a select group of family trusts, the professional outsourced agent-to-the-individual trustee can provide the best of both the corporate and individual trustee worlds.
The selection of the trustee and their successors will continue to challenge many families, grantors, and current trustees. For some, a corporate trustee clearly is the best solution as the initial or successor trustee. For others, an individual trustee acting on their own with a level of outsourced support is the answer. Finally, for a select group of family trusts, the professional outsourced agent-to-the-individual trustee can provide the best of both the corporate and individual trustee worlds. An increasing number of individual trustees also now are turning to the agent for trustee to support them as they transition their role to a new trustee or trustee solution.
The range of options for direction and guidance should ease the mind of any grantor or accidental trustee.