FOR LAWYERS

Every valid trust must contain the following four elements: 1) the grantor (also referred to as a settlor), who establishes and funds the trust; 2) the trustee, who is the individual or entity responsible for managing and distributing the trust's assets; 3) the beneficiary or beneficiaries, who are those that are entitled to benefit from the assets or property held in the trust, and 4) the specific assets or property transferred into the trust by the grantor. 

Because the trustee is responsible for administering and overseeing the trust and making distributions to the beneficiaries, selecting the right trustee is paramount to ensure that the grantor's intentions are accurately executed and that the beneficiaries' interests are protected. In this guide, we will discuss six significant factors to consider when choosing the most suitable trustee for various trust types.

1. Consider Whether to Appoint a Family or Professional Trustee

When selecting a trustee, it's critical to distinguish between family trustees and professional trustees, as each has distinct characteristics and potential implications:

Family Trustees. Family trustees are generally chosen because of their close relationship to the settlor and beneficiaries. Family trustees can be better suited to and quicker at responding to the changing circumstances of family members and disbursing funds from the trust accordingly. However, personal relationships can create conflicts, leading to potentially biased decisions. Furthermore, family trustees often lack knowledge of or experience in trust management. Other issues can arise if they can no longer serve due to health issues or other reasons and a contingent trustee hasn’t been appointed. 

Professional Trustees. Professional trustees such as banks, investment managers, and financial management firms will generally have specialized trust departments with complex dedicated systems and software dedicated to managing trusts. That said, they will be less familiar with the family dynamics, which can make them less effective at meeting the needs of individual beneficiaries.

A Hybrid Approach. Oftentimes, a hybrid approach is preferable. For example, you can appoint both a family member and a professional to act as co-trustees, where the family trustee can handle decisions related to beneficiaries and family needs, and the professional trustee manages the regulatory and financial aspects of the trust. 

2. Ensuring the Trustee Has the Necessary Qualifications and Experience to Manage Your Trust

Asset Protection Trust (APTs): APTs are irrevocable trusts designed to shield the trust’s assets from potential creditors. A spendthrift clause is often included in these types of trusts to provide additional layers of protection against creditors. To be effective, the settlor of the trust must relinquish control over its assets and how they are managed. Furthermore, the conditions under which distributions are made to the beneficiaries are, within certain parameters, left to the trustee’s discretion. 

Key Considerations: Because of the trustee’s enhanced discretion over disbursements, it is especially important to select someone who can be relied upon and can demonstrate a strong understanding of family dynamics so that they can, and will make distributions in accordance with your wishes. Furthermore, you may want to consider appointing a protector who can intervene in case the trustee fails to perform their tasks appropriately. 

Testamentary Trusts: A testamentary trust is a trust that is established upon one’s death per the conditions and terms set forth in their will. 

Key Considerations: Because testamentary trusts undergo probate, it is advisable to appoint a trustee who has experience and knowledge of the probate process. 

Revocable Living Trusts: In contrast to testamentary trusts, revocable living trusts (also referred to as inter vivos trusts) are established during one’s lifetime, and may be altered, modified, or revoked entirely by the settlor at any time. 

Key Considerations: Because the trustee will be managing the trust’s assets for a much longer period as compared to a testamentary trust (which is only created upon the settlor’s death), you should focus on fees and costs charged by the trustee for their services, as well as their proficiency in investing and generating healthy returns. Furthermore, because you retain complete power over the distributions, having a trustee with a deep understanding of family dynamics is not as important.

3. Fees and Costs 

Fees and costs are crucial considerations when shopping around for a trustee. When exploring your options, you should carefully evaluate the fee structure to make an informed decision.

  • Fixed Fees: Some trustees charge a flat fee for their services, regardless of the size of the trust or the value of assets under management. This can be advantageous because you will know in advance exactly how much you will be charged.
  • Percentage-Based Fees: Many trustees will calculate their fees as a percentage of the trust's assets. While this can be an excellent option for smaller trusts, it is less advantageous in the case of larger trusts.
  • Hourly Rates: Some trustees, especially individual or smaller professional trustees, might charge based on the time they spend administering the trust. This can be advantageous for trusts that require minimal active management but can be a much less attractive option for larger trusts with assets that are being actively invested. 
  • Additional Charges: Some trustees will impose additional charges and fees for any number of add-on costs and nonroutine expenses, whereas other trustee contracts will price their services to include those services. Therefore, even though one trustee’s services can seem cheaper at first glance, they may cost you more in the long run if they impose additional costs and fees for a wide range of contingencies and expenses.

4. Conducting Background Checks 

Performing background checks on prospective trustees can be essential in identifying potential red flags or issues. It is advisable to conduct both criminal and financial background checks. Criminal checks will reveal any past legal issues, such as fraudulent activities, embezzlement, etc., while financial checks can reveal any past bankruptcies, liens, or significant financial problems that might compromise the trustee's ability to manage the trust effectively.

The background check should also investigate whether there are any potential conflicts of interest the prospective trustee might have concerning the trust's assets or beneficiaries. For example, the trustee might have a business partnership or undisclosed financial relationship with one of the trust's beneficiaries, potentially skewing their decision-making in favor of that beneficiary.

5. Establish Trustee Oversight Mechanisms. 

Having mechanisms in place ensures that the trustee is complying with the terms of the trust and that its assets are being managed in the best interests of its beneficiaries.

  • Requiring the submission of periodic financial reports (e.g. monthly, quarterly, or annually) on how the trust is being managed, and its assets are being invested.
  • Incorporating a stipulation in the trustee agreement whereby the trustee agrees to undergo third-party audits that can reveal potential discrepancies, mismanagement of assets, or breaches of fiduciary duties. 
  • Including procedures such as mediation or arbitration for resolving any disputes that can arise regarding the interpretation of the trust’s terms, the management of the trust, or the distribution of its assets to its beneficiaries.  
  • Appoint a trust protector to monitor the trustee’s activities and intervene if the trustee is not acting in compliance with your directions or intentions. This is especially relevant in the case of an APT where the trustee has discretionary power over the trust’s distributions.

6. Review the Trustee’s Insurance Coverage.

Regardless of the professional capacity a trustee is serving within (e.g., broker-dealer, financial adviser, etc.), they will probably be required by law to maintain professional liability insurance coverage. That said, verifying the amount and scope of coverage is crucial, as they can be the bare minimum required by law. As such, you should review the policy and, if it is insufficient, consider negotiating better terms. 

As you can see, choosing a trustee can be a very complex task that should be specifically tailored to your situation. Through AAL’s directory, you can find many attorneys with extensive experience in trust transactions who can assist you in choosing the best trustee for you and your beneficiaries.

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