Picking The Right Trustee – Important Considerations

A trustee is the person or institution appointed to manage a trust on behalf of beneficiaries of the trust.

Being a trustee is a significant responsibility. Those serving in this role must always act in the best interests of beneficiaries when carrying out their trust management duties, which include locating and protecting trust assets, investing assets prudently, distributing money and property to beneficiaries, keeping track of income and expenditures, and filing taxes.

When a trustee does not fulfill their duties, beneficiaries have the right to file a lawsuit against them. Trust litigation can have significant financial and emotional consequences, draining estate assets and damaging the relationships between the parties involved.

While a family member is often the first choice to serve in this position, to avoid potential conflicts of interest and disputes among heirs, and to ensure proper trust administration, a professional, independent trustee might be a better choice.

Trust Fundamentals

Most people have heard of trusts and have a basic idea of how they work. The inner workings of a trust, however, are complex and may not be as well understood.

Trusts are created by a document called a trust agreement or trust instrument. They can also be created as part of a person’s will. There are three parties to a trust:

• The settlor (also referred to as a grantor) is the person who establishes the trust, funds it, and provides instructions in the trust document about how to administer it.
• The trustee is the person the settlor names in the trust document to administer the trust. They can be an individual, such as a trusted family member, a corporate entity, such as the trust department of a bank, or other financial institution, or a trusted professional, such as an attorney.  The trustee must voluntarily accept their position.
• The beneficiary is the individual (or entity, such as a charity) for whose benefit the trust was created. Trusts can have multiple beneficiaries.

Trusts can hold many types of assets, including financial assets like cash, stocks, bonds, and bank accounts, as well as real estate, life insurance, retirement accounts, personal property, and even things like business interests and digital assets.

The assets that are transferred into the trust become the property of the trust — they no longer belong to the settlor.

Trust property is subject to the trustee’s management and control, but the trustee doesn’t own the assets in its own right. Rather, they hold and administer trust property/assets for the benefit of a third party (the beneficiary/beneficiaries). A beneficiary only owns a trust asset once the trustee distributes it to them from the trust.

Duties and Responsibilities of a Trustee

Because a trustee is not a beneficial owner of the trust assets, they are not free to do whatever they want with the assets. Rather, they must hold, administer, and distribute the trust fund in accordance with the terms and conditions specified by the settlor in the trust instrument and in accordance legal requirements.

Fulfilling the Settlor’s Wishes

Trusts are highly flexible and can contain detailed provisions about how to distribute money and property to beneficiaries. For example, the settlor may provide instructions that a beneficiary receives assets only once they reach a certain age, educational, or career milestone.

The conditions a settlor can place on distributions are virtually limitless. But whatever condition the settlor sets, unless the condition is illegal, uncertain, or against public policy, the trustee must follow it.

Enforcing a conditional gift from a trust can place a greater burden on the trustee because they will have to determine whether the beneficiary has satisfied a condition necessary to receive a gift.

If there is any uncertainty about a condition being met, this could cause tension between the trustee and the beneficiary. Anyone using trust-based conditional gifting should therefore make sure the trustee is up to the potential challenges of conditional gifting and other detailed trust instructions.

Fulfilling Fiduciary Duties

Although their duties are specific to the trust document, the types of assets held in the trust, and the trust’s purpose, a trustee must also comply with requirements in the law referred to as “fiduciary duties.”

These are legal duties that they must follow when managing and distributing a trust for the trust’s beneficiaries. They include the duties of care, loyalty, good faith, and neutrality.

Fiduciary duties require the trustee to manage the trust in a reasonable, good faith manner. They must put the interests of the trust and its beneficiaries above their personal interests. “Consequently,” notes Stanley Vasiliadis, an attorney with the law firm of Vasiliadis Pappas Associates, “what a trustee might choose to do with its own property, such as engaging in speculative or risky investments, it will not be permitted to do as a trustee.”

Fulfilling Administrative Responsibilities

The most basic job of a trustee is to manage and administer trust assets in accordance with the trust’s terms and purposes and in the interests of the beneficiaries. Typically, this includes the following responsibilities:

• Identifying, collecting, and valuing trust assets
• Managing investments of trust assets
• Protecting the value of trust property
• Distributing assets/payments to beneficiaries
• Paying debts and taxes
• Preparing and filing financial reports
• Keeping a record of all financial transactions
• Communicating with beneficiaries, answering their questions, and disclosing information to them
• Making decisions as needed to fulfill the trust’s provisions

On this last point, many settlors give a trustee some degree of discretionary power, such as the option to enforce a conditional gift provision.

While authorizing a trustee to use their discretion gives them some leeway to decide what to do — or not do — the trustee must not violate their duties or beneficiaries’ rights when making such decisions.

Failure to Fulfill Duties and Trust Litigation

Anyone who accepts the position of trustee needs to understand its significant responsibilities. Once they accept their position, unless otherwise specified in the trust instrument, the beneficiaries cannot remove the trustee absent permission from a court. Typically, a trust document will specify that a trustee can only be removed for cause. That determination must be made by a court.

There could be grounds for removal if a beneficiary (or multiple beneficiaries) believes the trustee is not upholding their legal responsibilities. For example, they might suspect that the trustee is not making distributions per the settlor’s instructions, not disclosing information about trust assets, using trust assets to enrich themselves, or mismanaging assets.

If a beneficiary suspects that a trustee has not met their legal obligations — whether those obligations are imposed by a trust document or under the law — the beneficiary could sue them.

Trust litigation can result in a trustee being held personally liable and ordered to pay back beneficiaries for financial harm. They can also be ordered to provide a full accounting of all trust assets and removed from their trustee position.

Types of Trustees and Whom to Choose

A close friend or family member, a third-party professional, or an independent trust company are commonly named as trustees. Co-trustees are also possible.

It’s prudent for a settlor to name a successor, or backup trustee in the trust document. If a trustee is removed and no successor is named, the parties will have to petition the court to appoint someone new to the role.

Individual Child or Family Member

On the surface, an adult child who is responsible, trusted, and knows the family dynamics is a good choice for trustee. But a child — or any family member — may in practice not be the most appropriate person.

Depending upon the requirements involved, the role of trustee may be too complex or onerous to be handled by anyone other than a corporate entity engaged in the business of managing trusts. On the other hand, a revocable trust created by and for the settlor; or a Medicaid Asset Protection Trust may, without too much difficulty, be managed by an individual, and in the case of revocable trusts, often by the settlors themselves.

Being close to the family is a double-edged sword. Family relationships are complicated, and those complications could spill over into trust administration, especially in cases where trust beneficiaries are members of a blended family encompassing children from multiple marriages.

A person could be too close to make objective decisions, and even if they are acting objectively, their actions could be perceived as unfair or illegal, particularly if they are both the trustee and a beneficiary of the trust. And real or imagined wrongdoing on the part of a trustee can have the same outcome: trust litigation.

At a minimum, a trustee chosen from within the family should have a relationship with an estate planning attorney who can help them perform trust management competently, fairly, and legally.

Consider a Private or Professional Trustee

An independent trustee that specializes in trust fund management, such as an attorney, advisor, or accountant, a private fiduciary from an independent trust company, or a corporate trustee from a financial institution like a bank, can bring an unbiased, outside perspective that helps to avoid family discord. These entities will typically have the necessary knowledge, experience and sophistication required to properly administer the trust whereas many individuals do not. On the other hand, professional trustees may often refuse to accept appointment if the trust fund fails to meet a specified minimum amount.

Estate planning attorneys possess the expertise to assist their clients in fashioning the right kind of trust for them. Selection of trustee is a key element. Contact the lawyers at Vasiliadis Pappas Associates. We can help!