Should You Name a Relative as Trustee?
Wise estate planning typically involves setting up a trust for your family. And one of the most important decisions to make when establishing a trust, whether revocable or irrevocable, is who you will appoint to manage it.
Very often, a family member is named trustee, and that makes sense for a lot of reasons. But the job has many responsibilities. Sometimes, having a family member act as trustee can impair family relationships. Jealousy, greed and mistrust can creep in and, in rare cases, problems could end up in court.
Designating a capable trustee is an important decision for the long-term well-being of your family. Here are some key considerations before naming a family member as trustee.
Family is the root of familiarity
The biggest reason for naming a family member is simply for familiarity. When it comes to someone you can really trust, a parent, sibling or child usually tops the list.
The designated family member probably knows you well and understands your wishes and desires on how to use the money in the future for the benefit of the family. A relative is in the best position to apply family values when making decisions to grant funds.
And it may be easier for a beneficiary of your trust to sit across the table with grandma or uncle to explain face-to-face why they need the distribution.
Lower cost may be another reason a family member can be a good choice. Family members may be entitled to compensation for their service, but they often waive payment. Unless it’s a large trust or the relative is a financial or legal professional, fees may not come into play.
But it’s a big job
The role of trustee, however, is and can be time-consuming. I’ve seen situations where a family member or a friend is named trustee and they are not prepared to take on the responsibilities of the role.
Whomever you designate needs to have an understanding of trust income taxes. Tax laws can change, and a trustee should stay abreast of current law as well as the requirements for filing deadlines, estimated tax payments, and the tax impact of distributions and investment decisions.
There’s also the responsibility of prudently investing the assets to meet the needs of the beneficiaries and appropriately monitoring the underlying assets. In addition, a trustee needs to be aware of compliance requirements, such as notifications to beneficiaries.
And when the trust has multiple generations as beneficiaries, it can be especially tricky to be fair and equitable to everyone. If a beneficiary appears to be reckless or has addiction problems, saying “no” can be extremely difficult, both personally and legally. At the same time, the trustee may be subject to personal liability for errors and mismanagement.
Another consideration is the age of the trustee. It’s not uncommon to see clients name someone who is similar to their own age. As the trustee ages, they may not be interested in or capable of doing the job. If the trust beneficiaries are a generation or two younger than the grantor, a younger successor may be an important consideration.
Delegate to professionals
One alternative to naming a family member as trustee is to hire a professional. A professional firm will act as a fiduciary and provides all the expertise and services in house, from taxes to compliance, and that’s a big benefit. It may also provide investment management, or can work with your existing investment advisor.
If you still feel better having a family member manage the trust, encourage them to consider delegating some of the responsibilities to a professional.
For an irrevocable trust, which cannot be changed once established, you should consider appointing a board of trustees comprising both family members and professionals. A trust protector may be among them. This is a fiduciary who can protect you and your beneficiaries by helping to replace a trustee or amend the trust due to law changes. The trust document should outline the specific role of a trust protector and include language that provides flexibility to change trustees as needed.
Finally, an independent wealth manager with estate planning expertise can work with your attorney to set up the trust and help you select the right trustee for you and your family.
Whether you choose a family member, a professional firm or a combination of both, be sure to review your trust regularly with your wealth manager to ensure it accurately reflects your family’s needs for now and future generations.