For many trust grantors, choosing a trustee is one of the most challenging tasks of setting up a trust. The grantor must have confidence that the trustee will not only carry out their wishes, but also possess the stewardship skills necessary to protect the trust’s assets.
Grantors must also find someone willing to take on the responsibilities of managing a trust. These responsibilities include investing and managing assets, distributing funds to beneficiaries, tracking trust activities, representing the trust in legal matters, filing tax returns and communicating regularly with all stakeholders. The trustee must also demonstrate that they have the technical knowledge, sound judgment, objectivity, integrity and time to carry out the terms of the trust.
In addition to these responsibilities, other factors play into the selection of a trustee. The size of the trust, its purpose and duration, the beneficiaries’ locations, and tax ramifications can all impact the grantor’s trustee designation.
Given the many aspects of the trustee’s job, a grantor must carefully approach the process of selecting a trustee. Grantors generally have four options for who may serve as trustee, each of which has pros and cons:
Option 1: Family member
Asking a family member to serve as trustee can be a good option, particularly since they know the grantor and the family dynamics well. However, a family member may not have the skillset or time to properly manage a trust, particularly if the trust’s assets are sizable or the trust has a long duration. A family member trustee may also lack the objectivity and impartiality a third-party trustee might provide.
Option 2: Friend
A grantor could also choose a close friend to serve as trustee. Like a family member, this person likely understands the family background, including beneficiaries’ personalities and history. As a nonrelative, a friend grantor may also retain a level of neutrality when making trust-related decisions. However, the grantor must choose someone with the skills, time and interest to manage the trust.
Option 3: Lawyer or accountant
A grantor’s attorney or accountant could also be a good choice for a trustee, especially since they have firsthand knowledge of the grantor’s legal or financial situation. However, one downside of going this route is that trust management fees could be higher than they would be if a friend or family member is selected. This could be especially true if the lawyer or accountant charges an hourly rate for their trustee services. Furthermore, while your lawyer may understand the legal issues of the trust, a lawyer trustee may not be as well versed in financial topics (such as taxes or investments) as an accountant, and vice versa.
Option 4: Corporate trustee
The final option for grantors is to select a corporate trustee, typically available through a bank, trust company or investment firm. Corporate trustees usually have the financial and legal expertise and resources necessary to manage the trust successfully. Corporate trustees also have some potential downsides, including trustee fees that could be higher than an individual’s fees, processes to request a distribution, and lack of full understanding of the dynamics of the parties involved.
Grantors also have a fifth option to consider: selecting multiple trustees. It is possible to name more than one individual, or a combination of an individual and corporate trustee, to manage the trust. In this scenario, the trustees can bring different but complementary skillsets and perspectives to the management of the trust.
Finally, it is prudent to select a successor trustee to serve when the initial trustee ceases to serve. This is particularly true for trusts with a long time horizon. There are a few approaches to selecting a successor, including (but not limited to) the following:
· Name a list of successor trustees in the trust document.
· Establish a methodology for the beneficiaries of a trust to select a successor trustee.
· Give the trust beneficiaries the power to remove and replace the trustee with a new trustee that meets any trustee qualifications included in the trust document (for example, age or experience).
· Grant a third party (for example, a trust protector) the authority to remove and replace a trustee or name a successor trustee to fill a vacancy.
Each of these options should be considered in light of the many factors noted above. At CIBC Private Wealth, we can help you evaluate your options and decide which type of trustee is right for you. To learn more, explore our about our full range of wealth planning and trustee services.