Choosing a Trustee for Your Estate Plan
Selecting the right person or entity to manage your trust is arguably the most critical decision in your estate plan. While drafting the documents is a legal process, the success of your plan relies entirely on the trustee’s ability to execute your wishes. Whether you are preserving wealth for the next generation or protecting a specific asset, the trustee holds the keys to your legacy.
Understanding the Trustee's Job Description
Before naming a candidate, you must understand what the job entails. Being a trustee is not merely an honor; it is a legally binding job with significant fiduciary responsibilities. It is often a burden rather than a privilege.
A trustee is responsible for managing the assets held in the trust for the benefit of the beneficiaries. Their duties include:
- Investment Management: Making prudent investment decisions to grow or preserve the principal.
- Distributions: Deciding when and how to give money to beneficiaries based on the rules you wrote (often for Health, Education, Maintenance, and Support).
- Record Keeping: Maintaining accurate accounting of all income and expenses.
- Tax Compliance: Filing income tax returns for the trust (IRS Form 1041) and issuing K-1s to beneficiaries.
- Impartiality: Balancing the needs of current beneficiaries against the rights of future beneficiaries.
If a trustee mismanages funds or fails to follow state laws, they can be personally sued for breach of fiduciary duty.
Option 1: The Individual Trustee
Most people look to family members or close friends first. This is often the most comfortable choice, but it comes with specific risks and rewards.
The Pros of Family Trustees
The primary advantage is cost. A spouse, sibling, or adult child will often serve without charging a fee. They also possess intimate knowledge of family dynamics. If you want a trustee who understands that your daughter needs money for rehab rather than a new car, a family member is more likely to understand the nuance than a bank officer.
The Cons of Family Trustees
The biggest downside is a lack of technical expertise. A well-meaning uncle might not understand the “Prudent Investor Act,” which requires diversification of assets. If they leave all the money in a low-interest savings account or gamble it on a single volatile stock, they are failing their duties.
Furthermore, naming one child as trustee over another can create permanent rifts in sibling relationships. It puts the trustee in the awkward position of having to say “no” to their brothers and sisters.
Professional Individual Trustees
If family members are not a good fit, you can hire a professional individual, such as a CPA or an estate planning attorney. They charge hourly rates or a percentage of assets. While they offer expertise, they lack the institutional longevity of a corporate trustee. If your professional trustee retires or passes away, you are back to square one.
Option 2: The Corporate Trustee
A corporate trustee is a bank or trust company authorized to act as a fiduciary. Examples include institutions like Northern Trust, Bessemmer Trust, Vanguard National Trust Company, or the trust division of a commercial bank like Wells Fargo or Bank of America.
When to Choose a Corporate Trustee
You should strongly consider a corporate trustee if:
- Complex Assets: You own commercial real estate, closely-held businesses, or sophisticated investment portfolios.
- Family Conflict: There is friction between beneficiaries, or you suspect your children will fight over distributions. A bank is a neutral third party that follows the document to the letter.
- Long-term Trusts: If you are creating a “Dynasty Trust” intended to last for generations, a corporation will outlive any individual.
The Cost of Corporate Trustees
Corporate trustees are not cheap. They typically charge an annual fee based on a percentage of the Assets Under Management (AUM).
While fees vary by institution, typical fee structures look like this:
- 1.00% to 1.50% on the first $1 million to $2 million.
- 0.75% to 1.00% on the next $3 million to $5 million.
- 0.50% on amounts exceeding $5 million or $10 million.
For a $2 million trust, you might pay roughly $25,000 per year in fees. However, this usually includes investment management services. Additionally, many institutions have minimum asset requirements. For example, Vanguard National Trust Company generally requires a minimum of $500,000 to manage a trust, while boutique trust companies may require $1 million or more.
Criteria for Selection: A Checklist
Regardless of whether you choose an individual or a corporation, apply these four criteria to your decision:
1. Financial Literacy
Does the candidate understand the difference between income and principal? Can they read a financial statement? If you choose an individual who is not financially savvy, you must ensure the trust document allows them to hire (and pay for) financial advisors and accountants to help them.
2. Emotional Stability and Integrity
The trustee holds the checkbook. They must be incorruptible. If a family member has a history of personal debt, gambling issues, or bankruptcy, they are not a suitable candidate. They must also be able to withstand pressure from beneficiaries who want early distributions.
3. Location and Logistics
Tax laws vary significantly by state. A trustee in California faces different tax implications than a trustee in Texas or Florida. If you select a corporate trustee, consider using one based in a state with favorable trust laws, such as Delaware, South Dakota, or Nevada. These states have laws that allow for greater asset protection and tax savings.
4. Availability and Age
If you are 70 and you name your 75-year-old brother as trustee, he may not be able to manage the trust for long. Always name successor trustees to take over if the primary trustee dies or becomes incapacitated.
The Hybrid Solution: Co-Trustees
You do not have to choose strictly between a cold corporate entity and a warm family member. Many estate plans utilize co-trustees to get the best of both worlds.
In this scenario, you appoint a family member (like a spouse or child) to handle discretionary distribution decisions (the “heart” of the trust) and a corporate trustee to handle investments, accounting, and taxes (the “brains” of the trust).
If you take this route, your estate attorney must draft the document carefully to define who breaks a tie if the co-trustees disagree.
Frequently Asked Questions
What is the difference between an Executor and a Trustee?
An executor (or personal representative) manages your estate during the probate process, which typically lasts 9 to 18 months. Their job ends once assets are distributed. A trustee manages assets held in a trust, which can last for years or even decades. One person can serve in both roles, but the jobs are distinct.
Can a beneficiary also be a trustee?
Yes, this is very common. For example, you might leave money to your daughter in trust and name her as the trustee. However, to protect the assets from creditors and taxes, her power to distribute money to herself is usually limited to “Health, Education, Maintenance, and Support” (HEMS). If she has unlimited power to pay herself, the asset protection features of the trust may be voided.
Can I fire a trustee?
You can always change the trustee while you are alive and have a revocable trust. After you pass away (or if the trust is irrevocable), the beneficiaries can only fire the trustee if the trust document grants them that power. It is wise to include a “removal and replacement” clause in your trust. This allows a majority of beneficiaries to fire a corporate trustee and hire a new one without going to court.
Do individual trustees get paid?
Yes. State laws generally entitle trustees to “reasonable compensation.” If your brother serves as trustee, he has a legal right to charge the trust for his time, even if he chooses to waive that fee. “Reasonable” is often defined by state statute or court precedent, but usually falls between 0.5% and 1.0% annually, depending on the complexity of the work.