Choosing the right trustee is one of the most important — and difficult— decisions individuals face when forming a trust. Students of history, and those of a certain age, likely recall how former presidents Gerald Ford and Harry S. Truman often were referred to as “accidental presidents,” since both men assumed the role without really seeking or preparing for the office. Individuals appointed as trustee often find themselves in a similar situation when selected to fulfill a role, they neither sought out nor prepared for, hence the term “accidental trustee.”
Selecting a trustee, or serving as one if selected, raises a number of challenges for many families — not the least of which include changing circumstances, family dynamics, and succession plans as current trustees age out of the role. Many families, however, aren’t aware of the options that exist for trustee support and guidance.
Understanding the job: Trustee roles and responsibilities
Prior to selecting a trustee, the grantor, along with their attorney, other advisors, and family members, must ensure the trustee has the skills — and the available amount of time — to execute the primary trustee responsibilities, including the ability to:
- Commit to the role for the long term to minimize disruption, dedicate the necessary time to the trust’s efficient oversight and management, and act in an ethical and unbiased manner toward all parties involved while ensuring compliance with trust provisions and other legal requirements.
- Provide annual statutory principal and income accounting as well as regular communication, education, and accounting to beneficiaries.
- Manage income and principal cash using proper discretion to distribute funds appropriately and fairly while being sensitive to the financial needs of beneficiaries.
- Manage tax ramifications and ensure the 1041 trust tax return is completed and filed in a timely manner.
- Manage trust investments, including developing an investment policy statement, selection and monitoring of investments, and potentially partnering with an investment advisory firm.
- Handle the details of management, valuation, and protection of trust assets, including special assets such as real estate, partnerships, private equity, and family-owned businesses.
- Safeguard trust assets with the appropriate custodian, insurance, internal controls, cybersecurity, and an independent audit, as needed.
It’s a lengthy list, and often the individuals selected as trustee have the best of intentions but understandably don’t have the wide range of skills needed to be fully effective. In these situations, families have several options.
Trustee options: Factors to consider
Corporate trustees
Corporate trustees often are chosen by a family because of the complexities of the trust, the amount of time required in the trustee role, and the special skills needed in investing, taxes, bookkeeping, cash management, and compliance. Corporate trustees work in a bank or trust company that’s either federally or state-regulated and staffed by individuals who specialize in these and other skills of trust administration.
A corporate trustee may be the right solution for families that don’t have individual trustee alternatives or need professionals to manage complex assets or challenging family dynamics. On the other hand, corporate trustees can sometimes be less flexible than individuals and may not have the same understanding of the family business or dynamics as a trusted advisor or family member.
Individual trustees
An individual trustee — usually a business partner, close friend, attorney, accountant, or family member — can be named to act as trustee over family wealth. They often have intimate knowledge of the family dynamics and unique assets, however, they may lack the time, resources, and expertise to manage this wealth appropriately. Most individual trustees who need help serving in the role opt to outsource some of the work to their CPA and their lawyer or another professional organization that specializes in agent for individual trustee services.
Agent for individual trustee
An agent for the individual trustee is an outsourced role that assists the individual trustee with administrative duties and provides expert guidance to make informed decisions regarding the trust. The agent for individual trustee is a professional fiduciary to the trustee but isn’t a decision-maker for the trust. The agent for individual trustee should be a professional organization that can also be a corporate trustee if necessary.
Under this arrangement, the individual trustee retains the power and fiduciary duty toward the beneficiaries, serving in the role of CEO or chairman of the trust. The agent for the trustee typically handles the day-to-day administration of the family wealth, manages or provides guidance over investment advisor solutions, and discusses and educates the trustees on how best to formalize distribution decisions. Think of the agent for trustee as the “chief operating officer” (COO) to the family wealth, providing best-in-class guidance and support to the individual trustee.
Appointing an agent for the trustee often is a positive, flexible, and long-term solution, especially during the transition of individual trustees. An agent for the trustee can be a huge help to an overwhelmed trustee, reducing the amount of time the individual trustee needs to spend on trust matters by as much as 90%. For a select group of family trusts, the professional agent for trustee can provide the best of both the corporate and individual trustee worlds.
Final thoughts
The selection of the trustee and their successors is an ongoing challenge for many families, grantors, and current trustees. For some, a corporate trustee clearly is the best solution — either as an initial or successor trustee. For others, an individual trustee acting on their own with some level of outsourced support is the answer. Finally, for a select group of family trusts, the agent for individual trustee provides the best of both the corporate and individual trustee worlds, and an increasing number of individual trustees also now are turning to an agent for trustee to support them as they transition their role to a new trustee or trustee solution.
Whether you’re a grantor or accidental trustee, there’s a range of options for direction and guidance should it become necessary.
