Choosing a trustee

The trustee determines how well a trust actually works. A well-drafted document administered badly produces worse outcomes than a simple document administered well.

What the role involves

Managing and investing trust assets. Making distribution decisions, frequently discretionary. Keeping records and accounting to beneficiaries. Filing trust tax returns. Communicating with beneficiaries, some of whom may be unhappy.

For a trust lasting until a beneficiary reaches thirty-five, or for the lifetime of a beneficiary with a disability, this is a commitment of decades.

The duties

A trustee is a fiduciary, subject to obligations that are enforceable.

Loyalty, acting solely in the beneficiaries' interests, with self-dealing prohibited.

Impartiality between beneficiaries, which is genuinely difficult where one is entitled to income and another to the remainder — their interests are directly opposed on investment strategy.

Prudent investment, under standards that in most states require diversification and consideration of the trust's purposes.

Accounting, providing beneficiaries with information about assets and transactions.

Breach can result in personal liability, which most family trustees do not appreciate when accepting.

Family member as trustee

The advantages. Knows the family and the beneficiaries. Generally serves without fee. Can exercise discretion with genuine understanding of circumstances.

The disadvantages. May lack investment and administrative expertise. May be placed in an impossible position when refusing a sibling's request for a distribution. May not outlive the trust.

And a family trustee who is also a beneficiary has an inherent conflict, which is manageable with careful drafting and is a genuine issue.

The distribution decisions are what cause the difficulty. A parent's trustee refusing a distribution to a sibling generates lasting family damage, and the discretion the settlor intended as protection becomes a burden.

Corporate trustee

The advantages. Permanence, professional administration, investment capability, systems, and insulation from family dynamics.

A corporate trustee refusing a distribution is applying a policy, which is easier for a family to accept than a sibling doing the same thing.

The disadvantages. Fees, generally charged as a percentage of assets and subject to minimums that make small trusts uneconomic.

Also: impersonality, staff turnover, and a tendency toward conservative administration that may not reflect what the settlor intended.

Corporate trustees generally will not accept trusts below a threshold value, which limits the option for modest trusts.

The combination approaches

Frequently the best answer.

Co-trustees, with a corporate trustee handling investment and administration while a family member advises on distributions.

A distribution adviser, a named individual with authority over distribution decisions while the corporate trustee administers.

A trust protector, an independent party with power to remove and replace the trustee, which provides accountability without requiring the protector to do the work.

The power to remove a trustee is worth including regardless of the structure, since a trustee who cannot be removed and is performing poorly is a serious problem.

The drafting that makes the role workable

Clear distribution standards. Purely discretionary distributions place the trustee in the hardest position.

Standards referencing health, education, maintenance and support give a framework, and a letter of intent explaining the settlor's thinking helps considerably.

Named successors, several deep, since the first choice may not be available.

A mechanism for appointing further successors when the named list is exhausted.

Provisions on compensation, so that a family trustee is not expected to work for nothing indefinitely.

Authority to delegate investment management, which allows a family trustee to engage professionals without breaching duties.

The letter of intent

Not legally binding and highly valuable.

A statement of what the settlor wanted the trust to achieve, how they would have exercised discretion, what they hoped for the beneficiaries, and what they would not want funded.

A trustee facing a difficult decision decades later has nothing else to go on, and the difference between a document and an explanation is substantial.