by Richard Keyt, Arizona estate planning attorney
If you are creating a revocable living trust, you will probably serve, at least initially, as either the sole trustee or as a co-trustee. You must decide who will serve as the successor trustee at the time of your death or incapacity. In some circumstances, grantors intentionally choose not to serve as trustee of their revocable living trusts, although they retain the right to amend or revoke the trust and to replace the trustee at any time.
If you are creating an irrevocable trust, it is much more likely that you will not be eligible to serve as a trustee (or as the only trustee) without compromising some of the intended advantages of these types of trusts. Usually for these types of trusts you will need to select a third party as trustee from the outset. The same is true for a testamentary trust since such a trust does not come into existence until after your death.
Choosing an Individual or an Institutional Trustee
For those trusts in which you cannot serve as a trustee or where a successor trustee is necessary, you must carefully consider the selection of trustee or trustees. A key decision is whether to choose a corporate trustee or an individual trustee (such as your wisest child or a trusted friend). When deciding, look deeper than viewing only the corporate trustee’s fee schedule. While the corporate trustee’s fee may appear to be more costly on the surface, more intense scrutiny often shows that a corporate trustee will cost the trust less in the long run, not only in terms of administration expenses, but also in terms of preserving the trust assets and family harmony.
Factors you should consider in picking a successor trustee include:
- The size of the trust estate. I always recommend a corporate trustee over an individual successor trustee when the value of the estate is large.
- For trusts with assets less than approximately $350,000, it may or may not be feasible to use a corporate trustee, depending on the ages and needs of the beneficiaries.
- Investment experience of the potential trustee.
- Will your child or friend be able to invest the trust assets appropriately for the beneficiaries’ circumstances? Will the assets be depleted due to inexperienced investment decisions, or not keep up with inflation out of fear of losing principal?
- The need of the potential individual trustee to hire a financial advisor.
- How do the costs compare to those of the corporate trustee, whose fees already include not only trust administration, but also investment management?
- The need to pay the potential individual trustee. Most trust agreements allow individual trustees to be compensated for their services.
- While your child or friend may initially agree to serve as trustee for your family, he or she may have no realistic idea of the amount of time or record-keeping that will be involved. Consider the benefits a corporate trustee can offer, especially in regards to time and financial strain.
- The ages and relationship of the beneficiaries to each other and to the potential individual trustee. For example, will your child or friend be able to stand up to the pressures put on him or her by other beneficiaries? If he/she feels it necessary to refuse a requested distribution to a beneficiary, how will his/her family relationship with that beneficiary be affected?
- The age and health of the potential individual trustee.
- If your child or friend resigns, becomes disabled, or passes away, who will take over in his/her place?
- The ability of the potential individual trustee to deal with paperwork, keep appropriate records, understand trust accounting, and properly handle required tax filings and notices.
- The failure of a trustee to properly and timely handle certain types of paperwork and notices could cause major consequences for you, your estate, or the beneficiaries. A corporate trustee is not only bonded and insured, but is subject to regular audits by State officials. Individual trustees are not held to the same standards or regulatory oversight as corporate trustees.
- The ability of the potential individual trustee to be unbiased in handling distributions to beneficiaries.
- Will your child or friend treat multiple beneficiaries the way you intended? Will your child or friend be afraid to make unequal distributions to beneficiaries even if the trust document specifies that distributions are to be tied to some condition, such as furthering education?
- Time commitments on the potential individual trustee. Often an individual has no idea that being a trustee can be very time-consuming.
- Willingness to serve as trustee. Never assume an individual will take on the responsibility of serving as trustee – Always ask first.
After you’ve weighed all of the factors relevant to your situation, you may decide that your child or friend is the perfect choice for your circumstances. Or, you may find that your trust will come out ahead if a corporate trustee is named due to expertise, experience, and efficiency. If you are concerned that a corporate trustee may end up acting in an unsatisfactory manner once appointed, you can instruct your attorney to include a provision in your trust that enables either the beneficiaries or a trust protector to remove and replace the trustee.