If you’ve decided you want to give your money to friends or family after you’ve passed away, you may want to consider placing it in a trust. Establishing a trust can protect a beneficiary’s assets from creditors and provide flexibility for families.
A trust is a legal entity where a trustee holds and manages assets on behalf of beneficiaries — the people who benefit from the assets in the trust.
Typically, the trustee is a family member or a professional, such as a lawyer or a bank or trust company. Trustees are responsible for administering a trust in the best interest of its beneficiaries, and also have to follow the rules of the state whose law governs the trust — which may not be the trustee’s home state.
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Selecting a trustee is a major decision, and you should consult your estate planning attorney throughout the process. Here are six important considerations to keep in mind when choosing a trustee.
1. Avoid conflicts of interest
One of the most important responsibilities of a trustee is to manage the trust without conflicts of interest. This means the trustee should not use trust assets for their own personal gain and must avoid any interests that conflict with those of the beneficiaries.
For instance, if a family business is part of the trust and a key executive is considered as a trustee, this dual role could lead to a potential conflict of interest if, for example, the executive were to put the interests of the business ahead of the interests of the trust’s beneficiaries.
Or if you name one of your children to oversee trust assets for all of them, a decision by the trustee to distribute money to his or her siblings may mean less for the trustee.
It’s essential to evaluate such scenarios carefully to maintain the trust’s integrity. You should select someone who you believe will make decisions that are in the best interest of all of the beneficiaries.
2. Choose someone who will be impartial
In today’s world of blended families, trustees often must navigate complex family dynamics. For example, you may want a trust to pay out to a second spouse or children from a previous marriage. Every decision, from investments to distributions, could be examined by competing parties.
Trustees must balance the interests of different beneficiaries. Commonly, trusts provide that income is distributed to a surviving spouse before the trust’s principal is distributed to children.
Especially where the surviving spouse is the children’s step-parent, this can lead to conflicting pressure on the trustee: The surviving spouse wants to maximize the trust’s income (usually interest and dividends), while the children want to maximize the growth of the principal.
Trustees should be prepared to mediate between competing interests and maintain a balanced approach to decision-making so that no beneficiary feels disadvantaged.
3. Determine the type of trustee
You have a number of choices when selecting a trustee: An individual trustee, individual co-trustees, a corporate trustee or a combination of individual and corporate trustees.
When making this decision, talk to all the people you’re considering to confirm they’re willing to take on the responsibility, and be very thoughtful and transparent about how the trust is going to operate.
Co-trustees can provide value in certain situations since they’ll share the labor and time-consuming responsibilities. But when multiple trustees are involved, active participation is crucial.
Each trustee may be responsible for the conduct of all the trustees, and if a trustee acts improperly, it may be necessary to involve the courts. The more involved a trustee is with both major and minor decisions, the less likely it is that another trustee’s conduct will be a surprise.
These responsibilities apply regardless of whether trustees receive compensation.
Recently, many trusts have taken a combination approach between a corporate trustee that maintains the records, sends account statements, custodies the assets and makes sure taxes are paid on time, and one or more individual co-trustees.
These trustees have a closer personal connection to the beneficiaries and oversee how trust assets are invested, and whether and when trust money is distributed to beneficiaries.
This allows the individual trustees to be involved with strategic decisions without the responsibilities of day-to-day administration.
4. Consider trustee liability
Trustees can be held personally liable if they do not adhere to high fiduciary standards, put the beneficiaries’ needs ahead of their own or if they don’t follow reasonable procedures for making decisions.
Courts have the authority to surcharge trustees for breaches of their fiduciary duty, but it’s possible that the trustee may not be able to cover the surcharge.
When selecting a trustee, it’s important to consider whether the trustee has either enough personal wealth or enough insurance to cover potential liabilities. This could help protect the trust and its beneficiaries from poor decision-making processes or trustees who don’t act in the best interests of the beneficiaries.
For example, the trustee’s own financial situation could lead to a conflict of interest where they might want to borrow from the trust even if it could generate higher gains with other investments.
5. Plan for successor trustees
Especially if you name an individual as your primary trustee, it’s important to name at least one successor trustee — someone to step in should something happen to the first trustee. People’s interests and focuses change, they move, fall ill, die — leaving you with no one to fulfill the duties of the office.
If you don’t name someone to step into the role of trustee or provide a mechanism for the beneficiaries to fill a vacancy in the role, a court may have to be involved; this can be expensive and time-consuming, and the person selected by the court may not be your ideal trustee.
Rather than leave this decision up to a court, or even up to your beneficiaries, you can name a series of people to be the trustee if their predecessor can no longer fulfill the trustee’s duties.
Many people name a primary trustee, one or two successor individuals, and then an institutional (corporate) trustee. And where people don’t want to name a corporate trustee, they can set out a framework for the beneficiaries to select a trustee.
Especially if you expect your trust to last for many generations, providing a mechanism to fill the role of trustee can be critical in keeping that decision out of court.
6. Coordinate with guardians
If a minor child or incapacitated adult is involved, consider their guardian’s ability to work effectively with the trustee responsible for financial decisions.
For example, the guardian may want their ward to attend an expensive private high school, or may want to provide their incapacitated ward with the highest level of medical care.
The trustee may not agree with spending the money in that way — especially in cases where the current beneficiary isn’t the same as the remainder beneficiary (the individual who will receive the remaining portion of an estate after all debts and taxes), or where the trustee is a sibling of the disabled person.
In general, the more explicitly you lay out your desires for the people you name as guardians and as trustees, the easier it is for those people to follow your wishes — and the less opportunity there is for conflict.
Choosing a trustee is an important component of estate planning. Carefully consider these key factors and consult your estate planning attorney when deciding who to select.
JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.
J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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