Whether you’re setting up your trust for the first time, evaluating who to appoint as your trustee, or simply curious about the role trustees play, this Complete Guide to Trustees will help you better understand the role of trustees and empower you to make better estate planning decisions.
What is a Trustee?
One of three key players in a trust, think of a trustee as similar to a manager for the trust who serves on behalf of the trustmaker and beneficiaries.
A trustee is a fiduciary, which means that the trustee has a legal responsibility to act in the best interests of the trust beneficiaries. The trustee also has a responsibility to carry out the trustmaker’s instructions as outlined in the trust agreement. Finally, the trustee has a duty to protect the interests of creditors of the trust and avoid taking actions that would harm those interests.
What Does a Trustee Do?
Trusts are highly customizable, and so the powers and responsibilities of a trustee may vary from trust to trust depending on the type of trust and the trustmaker’s instructions as outlined in the trust agreement.
For a trustee of a revocable living trust, the trustee’s responsibilities before and after the trustmaker passes away might look something like the following table:
| Before Death or Incapacity | After Death | |
|---|---|---|
| Responsibility to follow trust terms | Yes, although these may be amended by the trustmaker | Yes |
| Fiduciary duty | Primary emphasis serving best interest of trustmaker, who is typically the primary beneficiary during the trustmaker's life | Primary emphasis serving best interest of trust beneficiaries |
| Investment decisions regarding trust assets | Manage assets in trust as per trustmaker's instructions in the agreement, which may be amended by the trustmaker from time to time | Manage assets in trust for the benefit of the trust beneficiaries |
| Record Keeping | Maintain accurate records of trust transactions | Maintain accurate records of trust transactions, which will now more often include disbursements to and dealings with beneficiaries |
| Communication with Beneficiaries | Depending on trust, may or may not need to communicate with beneficiaries | Must communicate with beneficiaries about the trust and its administration |
| Tax Filings | Managed and paid through the trustmaker's individual account (e.g., social security number) | Managed and paid through new account created specifically for the trust (e.g., a new EIN) |
What to Look for in a Trustee
What to look for in a trustee is not all that different than what to look for in an executor of a last will. You’ll want to nominate someone who checks all the boxes:
- Trustworthy
- Demonstrates attention to detail
- Patient, yet deliberate
- Qualifies under your state’s rules
- Checks and opens the mail
- Not afraid to ask for help
Different Types of Trustees
There are two main types of trustees: corporate trustees and individual trustees.
- Corporate trustees are professional trustees – typically financial institutions or trust companies – that specialize in managing trusts and handling fiduciary responsibilities on behalf of individuals, families, businesses, or other entities.
- Individual trustees are just that – individuals. You might nominate a third-party professional such as an accountant, attorney, or financial advisor as your trustee, or you could choose a family member or friend instead.
Nominating your accountant, financial advisor, or other professional as trustee may be considered a corporate trustee or individual trustee, depending how you word the trustee nomination in your trust agreement.
Most professional firms will want to accept the nomination as an entity – a corporate trustee – to allow for greater flexibility if the individual person leaves the firm or is otherwise unable to fulfill the role. If you want a specific individual professional to serve and would not be comfortable with another person from the same firm in that role, you can add language to your trustee nomination that the nomination is conditional on that first-choice person serving.
What are the benefits of using a corporate trustee?
The major benefit you gain in nominating a corporate trustee is experience. Whereas most family member trustees might only serve in that capacity once or a few times in their lives, corporate trustees are professionals who do this day in and day out. That experience is particularly helpful if you have a complex trust or burdensome administration provisions.
A second benefit of engaging a corporate trustee over a friend or family member trustee is that doing so helps guard against potential bias or the perception of bias. Trustees are fiduciaries with a legal obligation to act in the best interests of all the beneficiaries. In theory, the trustee’s relationship to you should have no bearing on their decisions and actions, or how your beneficiaries perceive those actions, for that matter. In practice, however, that might not hold.
Although trust administration is generally smoother than probate, many beneficiaries are surprised that administration can take several months to upwards of a year, even when gifts are to be made outright.
That surprise can often manifest to frustration or even resentment of a family member trustee based on the perception (real or misguided) that the family member trustee is unnecessarily delaying distributions. By nominating a corporate trustee instead, Trustmakers can take this potential family conflict off the table.
What are the benefits of using a family member trustee?
Rather than nominate a corporate trustee, some Trustmakers prefer to nominate a family member trustee.
Family member trustees are often more cost-effective than corporate trustees. Most serve without compensation or at compensation rates lower than corporate trustees.This removal of (or at least decreased) financial interest can help assure other family members that the trustee’s interests are aligned with their own.
Since family members are usually more familiar with family matters than unrelated corporate trustees, an experienced family member trustee can sometimes be more efficient than a corporate trustee. They may be more likely to anticipate potential family issues that might arise and have an easier time contacting and communicating with other family members who have an interest in the trust.
Does a Trustee get paid?
Whether or not a trustee receives compensation depends on the trust agreement and the desires of the trustee.
A well-crafted revocable living trust or other trust agreement will specify how the Trustmaker wishes to compensate his or her trustees. A few of the more common compensation schemes include:
- No compensation. Reimbursement of reasonable expenses only
- Reasonable compensation and reimbursement of expenses. What constitutes “reasonable” will depend on your state’s statutes and the roles that the trustee is fulfilling. Highly involved trustees dealing with complicated or burdensome estates might be entitled to 3% or more of the trust assets under “reasonable compensation”
- A specific percentage of the trust assets
- A specific dollar fee
- A mix of fixed dollar fee and percentage of the trust assets
Corporate trustees tend to have standard fee agreements. As a Trustmaker, you’ll want to be aware of and/or agree on in advance of selecting that entity as trustee. Unless you’re an ultra-high net worth individual or masterful negotiator, it’s unlikely that you’ll be able to convince them to commit to a non-standard arrangement.
Most family member trustees tend to serve without compensation, but that compensation scheme is not suitable for every situation. To determine what’s best for you as a Trustmaker or family member trustee, you should weigh the arguments for and against compensating family member trustees.
Is being a Trustee hard?
The responsibilities of a trustee serving during and after the life of a Trustmaker can be immense. However, you don’t have to go at it alone.
Trust law and most all trusts empower trustees to engage third-party resources to facilitate the trust administration, paid for as an expense of the trust. As a trustee, you might engage third-party attorneys, accountants, or other consultants on an as-needed basis for anything that you are unable or uninterested in managing directly.
Depending on your experience, the nature of the trust, and the responsibilities that you take on directly, you might find serving as a trustee to be relatively straightforward. If this is your first time serving as a trustee, it’s a good idea to partner with someone who has more experience, whether that be formally or informally.
