How to: Choose a trustee
Caitlin DiMillo
Trusts are used for a variety of reasons. Whether the goal is to reduce taxes on the transfer of family wealth, ensure the intended disposition of assets for a non-traditional family, or provide for the proper management of assets, trusts can offer meaningful, tailored solutions to meet your objectives.
The “success” of a trust will ultimately be measured by the trustee's ability to administer the trust in a way that fulfills your intentions, while meeting the needs of your beneficiaries. The trustee, therefore, plays a pivotal role in the administration and management of any trust and the question of who should serve as trustee should be given careful consideration. Here are some qualities to look for:
1. Trustworthiness
A trustee must be trustworthy. Trusts often hold substantial wealth and may continue beyond your lifetime, perhaps for successive generations. You must be confident that your trustee will manage the trust assets appropriately and administer the trust using the terms you provided as a guide. Most trustee actions will also involve some level of discretion. This means trusting your trustee to say no sometimes, to make difficult decisions, and to exercise reasoned judgment.
2. Qualifications
A good trustee needs investment expertise, knowledge of the laws that govern trust administration and an understanding of the tax rules that apply to the trust and its beneficiaries.
- Investment expertise: Trust companies usually invest the assets for which they serve as trustee. Expect that an individual serving as trustee will need to do some due diligence on investment advisors. Any potential trustee or advisor can, and should, share with you past investment performance and information on how fees are charged.
- Knowledge of law: States may have uniform codes that govern matters such as the trustee's duty to inform and report to beneficiaries, a trustee's duty to diversify assets, or rules for how additions and distributions from trusts are to be characterized. Issues such as making sure a beneficiary knows a trust exists, diversifying concentrated positions in closely held business interests, or distinguishing between the interests of current and remainder beneficiaries all commonly fall within the purview of a trustee. If an individual trustee is not versed in these matters, she should engage another professional that is.
- An understanding of taxes: Fiduciary income tax rules are not intuitive and different tax rules may apply to different types of trusts. To further complicate matters, the timing of distributions, or whether distributions are made at all, can have a significant tax impact not only on the trust but also the beneficiaries. Your trustee may need to work with a tax professional to advise on tax matters.
3. Impartiality
Often an independent, unrelated person or entity is chosen as trustee, but this is not always the case. In some instances a beneficiary can serve as trustee of her own trust or can serve as trustee of a trust for the benefit of other family members, including the trustee. Ask yourself, “Will naming this person hurt family relationships or cause problems down the line?” While the future is hard to predict, trust your gut. If you can envision problems now, it is best to choose a trustee that is likely to be seen as more impartial.
4. A sense of partnership
It is imperative your trustee develop a good working relationship with your beneficiaries. Expectations should be set from the start that the trustee and beneficiaries are on the same team. A trustee needs to be both a good listener and a good communicator. To maintain the trust of your beneficiaries, and be a true partner, your trustee should be totally transparent. Being a partner also means building a relationship. Be thoughtful to select a person or entity as your trustee that will have the ability, resources and willingness to serve for a duration of time.
Choosing wisely when it comes to your trustee will help ensure that your objectives, and the beneficiaries' needs, will be met.
Caitlin DiMillo is a lawyer and director of account administration at Spinnaker Trust in Portland. She can be reached at cfdimillo@spinnakertrust.com
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