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Preparing a trust? Here’s how to set your trustee up for success

August 7, 2023 Article 4 min read
Jonathan S. Grossman Wealth Management Kristina McNeil
When setting up a trust, choosing the right trustee, and giving them the right directions are your biggest drivers of success. Follow these tips at the outset to help ensure a successful trust later.
Financial advisor discussing how to set up a trust.When setting up a trust, two critical factors are choosing the right trustee to carry out your wishes and providing appropriate language in your trust documents to direct the trustee when making distributions. If you can manage these two tasks, your trust will be in a good position for long-term success. Here’s how to get it done.

Choosing a trustee

When choosing a trustee, it’s important to find one that has the time and technical skills to follow through on your intended goals and wishes. Also consider any possible biases the trustee may have toward one or more beneficiaries, for example, if an intended trustee has a close relationship with a beneficiary, as sometimes happens with family member trustees.

Look for a trustee that will be consultative, proactive, and upfront with beneficiaries. A good trustee takes a hands-on approach with beneficiaries to educate them on the goals of the trust, explain how it’s interpreted, and come to agreement on how things will be handled to meet the goals you have as grantor.

Considerations for drafting distribution terms

The second vital factor when planning your trust is the directions you provide to your trustee for making distributions. As grantor, your distribution terms matter; the trustee will be limited by the terms and how liberal or restrictive they are.

As grantor, your distribution terms matter; the trustee will be limited by the terms and how liberal or restrictive they are.

Some grantors intuitively want liberal terms to enable beneficiaries to use money from the trust for whatever they might need. For example, trusts often have distribution provisions covering things like “health, education, maintenance, and support,” which are very broad. Or they might include items like “support for purchase of a first home” or “tuition expenses.” Overly broad terms like these may lead to potential problems for your trustee. Is the “first home” a $1 million home? Can it be a $9.5 million home? Is it restricted to a certain percentage of the trust assets, say 10% of the trust? Or, in the case of “tuition expenses,” does it envision standard state tuition, a more expensive school, or perhaps a school abroad? To avoid these problems, your distribution terms should include clear language that defines the scope of the trustee’s discretion.

Unfortunate consequences can also arise if you’re too specific with distribution provisions. Take for example a trust provision that specifies tuition will be reimbursed for a student taking “twelve credit hours.” While the intent is to encourage full-time study, a student taking eleven credits wouldn’t be covered in this situation, even if it’s nearly the equivalent workload of full-time study.

Another frequent problem is language that supports multiple interpretations. For example, a trust might provide for payment of 100% of tuition “if the beneficiary gets a 4.0 GPA.” But some schools weigh their grades and others don’t, potentially creating a disparity between beneficiaries depending on their choice of school. There could be four beneficiaries going to four different schools that average grades differently — now suddenly things aren’t as clear.

Where’s the best balance? The words chosen for a distribution standard in a trust document are of lasting impact. Usually, the more restrictive the terms are, the more complications are likely to arise, so providing your trustee with the most flexibility possible within your goals is often the best solution.

Usually, the more restrictive the terms are, the more complications are likely to arise.

In all situations, the trust document should indicate your specific intent in making trust distributions, the circumstances that warrant a distribution, and the intended needs of the beneficiary to be met by the distribution. When your intent is to be as restrictive as possible, use clear language and sufficient guidelines around amounts, circumstances, and other factors for making distributions. Discuss with your attorney the legal impact of the various distribution standards and how they’re likely to be implemented by trustees and interpreted by the courts.

To help shape a successful trust, consider these items:

  • Trustee selection: Choose a trustee that’s unbiased and preferably has experience administering trusts with similar goals to the one you’re creating. Find more tips on choosing a trustee here.
  • Agent for trustee: If you choose a noncorporate trustee such as a friend or family member, consider including an agent for trustee to assist the trustee. An agent for trustee can support an overwhelmed trustee by providing administrative support, offering guidance in applying distribution language, and helping ensure the trustee doesn’t misapply terms.
  • Avoid boilerplate distribution standards: Every trust is different. Work with your attorney to provide the right amount of flexibility to your trustee so that your values, philosophies, and specific intentions are properly articulated. Well drafted distribution standards will help ensure your wishes are carried out and provide the trustee with protection against overly demanding beneficiaries.
  • Involve the trustee early in the process: When possible, include the trustee early in the conversation and seek their input before executing the trust documents. This is particularly helpful when using a professional trustee so you can leverage their wide experience to identify potential problems.

The bottom line

As a grantor, you want to feel assured that your wishes will be carried out as closely to your original intent as possible. When you provide a competent, unbiased, and trustworthy trustee with suitable direction and discretion, you can feel confident that your trust will provide meaningful support to the people who are most important to you.

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