When preparing estate plans, many people believe they must name an institution, such as a bank, as trustee of a trust. Sometimes, naming a professional trustee makes sense, but in many cases it is not necessary. Before you name a trustee make sure you consider the differences.
Let’s step back and look at the duties a trustee performs. The trustee performs two primary duties:
- Legal responsibility to carry out the provisions of the Trust document.
- Manage the assets of the Trust.
A bank trustee will handle both of these duties. This type of trustee is appropriate if:
- You have a trust that is intended to last multiple generations — In this case, an institutional trustee, who will be around for the entire term of the trust, can provide continuity of management.
- You do not have someone you are confident can oversee the trust — Banks have tremendous experience and competence in managing trusts.
- There are significant family issues or disputes that require an independent and impartial trustee — You may not want to put an individual in the middle of potential disputes.
- There is a significant amount of money to manage (greater than $10 million) — Banks will typically manage trusts in an ultra-conservative manner and charge separate annual fees for trustee services, tax services and investment services related to the trust. These factors can erode the value of smaller trusts.
If these situations do not apply, you should consider a trusted friend or family member as Trustee. When you name an individual as trustee, the trustee duties can be divided. The individual carries out the provisions of the trust and an asset manager is hired to keep the assets in the trust properly invested, collect dividends, make income distributions to beneficiaries, etc. This arrangement is appropriate if:
- You prefer a trustee who knows your family personally. You may not want your spouse or family member to have to deal with a bank trust department when they need to get money from the trust.
- You would like the trustee to have some discretion and flexibility in making decisions about the trust property. Banks do not like to have discretion because it opens them up to lawsuits.
- You have less than $10 million and are concerned about fees. Typically a friend or family member will charge smaller (or no) fees for being the trustee. Therefore, the trust would only incur the costs of the investment management fee.
As with any investment decision, you need to weigh the issues carefully and consider the unique aspects of your personal situation. When it comes to deciding who should manage your trust, in some cases, a bank will be the best trustee; in others a family member makes the most sense.