How to Choose a Trustee

Wealthy individuals often establish trusts to hold assets for future disbursement to children or a spouse. Every trust requires a named trustee—a fiduciary who administers the trust and stewards the legacy of wealth through the years to come. Who should be given that important role?

Too often, busy entrepreneurs select a trustee in a casual, off-hand manner. They might say, “Oh, maybe my wife's brother would do it,” or “I’ll ask a good friend.” But beware: the potential repercussions of this choice can be significant and last years.

The Purpose of a Trustee

A trustee has responsibility toward:

• You, the grantor, who created the trust and provided the assets to fund it
• The beneficiary, or beneficiaries, who might receive income and, perhaps, part or all of the principle from the trust in the future
• The remainderman, property law jargon that refers to the beneficiary who receives the remaining balance or assets of the trust at termination

The trustee is charged with managing and disbursing the trust’s assets according to the grantor’s wishes. This task involves a balancing act: the trustee needs to meet the beneficiaries’ needs while also protecting the underlying principle for the remainderman.

Selecting a trustee is generally done in conversation with trusted advisors. A knowledgeable estate planning attorney will ensure all trust documents accurately reflect your intention and sidestep potential pitfalls. Your wealth management team should also participate in trust planning, because they have a deep understanding of your long-term strategy, assets, and family circumstances.

The Role Itself can Vary

A trustee performs their duties according to guidance provided in the trust document. If flexibility has been built into your documents, then your trustee is empowered with more options, and as needed, can have more nuanced conversations with beneficiaries about expectations and practical matters.

In reality, being a trustee can be straightforward or complicated, depending on the nature of the trust.

• On the simpler end of the spectrum is an irrevocable life insurance trust (ILIT). In this case, the only asset might be one or more insurance policies, and the trust won’t be funded until the insured dies. Generally, all that’s required of a trustee in this instance is to make sure premiums are paid, periodically request a copy of the in-force ledger, and ensure the insurance policy is performing properly.
• On the other end of the spectrum, a large trust could contain shares in a family business, a complex real estate portfolio, or mineral rights (i.e., ownership rights in underground resources such as oil or natural gas). In these cases, serving as trustee could well end up as a full-time job to ensure the assets are being managed in accordance with the terms of the trust. This trustee might oversee investment managers, tax and legal advisors, and hire specialists to be sure they're operating in a fiduciary manner.

At one time, trusts were governed according to the prudent man rule. In other words, “What would a prudent man do under similar circumstances?” This approach sometimes led to difficulty when trustees avoided risk and put assets in conservative investments like treasury and municipal bonds which didn't even keep pace with inflation, thereby diminishing the value for future beneficiaries. Today, trusts often provide an approach to distributions that balances growth and income, known as total return spending.

One fundamental concern is whether the family is harmonious or litigious, or whether there’s a likelihood of future discord. Trusts are litigation magnets, and a whole specialty of law practice is centered around fiduciary obligations and mismanagement of trusts. One lawsuit that made the newspapers in Atlanta years ago involved beneficiaries of a founding family of Coca-Cola who sued their trustee. They claimed the trustee failed to diversify holdings in the trust and as a result, the trust’s value plummeted. In another case, children of a prominent Atlanta family sued their parents over onerous trust provisions including monthly drug testing in order to get payments.

Anyone asked to be a trustee needs to understand what they’re getting into, especially with significant assets and heirs who don't get along. A litigious family is probably best suited for a corporate trustee with a good legal department. But in a harmonious situation, with a family friend you've known for 20 years and a simple trust consisting of a portfolio of publicly traded securities, serving as trustee is generally not much of an imposition.

Compensation for a Trustee

Fees charged for serving in the role of trustee generally reflect the complexity and scope of service. For example, when a trust is comprised of marketable securities versus an interest in an operating company, fees are generally lower. Often, grantors choose individuals over institutions to serve as trustee simply because they are reluctant to pay fees.

Cousin Mary might willingly agree to serve as trustee when you ask her. But down the road, she could find herself devoting half her work week for months dealing with the executor of your estate. It’s only fair for Mary, as named trustee who is spending extensive time administering the trust, to be compensated for this time. Leaving payment to the discretion of the heirs opens a can of worms. The estate beneficiaries might say, “Well, we don't want to pay Cousin Mary money. She doesn't do anything.” If the trust document spells out her compensation clearly, there is no squabbling.

When choosing an institutional trustee, understand their reputation and business model. What is their fee structure? Are they an independent trustee, exclusively focused on handling trusts? Or are they an institution that also manages money and may have material conflicts of interest? At Balentine, we are frequently asked to be trustee for clients but unable to accept. It would represent a conflict from a compliance standpoint, as we're also getting paid to manage money.

Who is the Ideal Trustee?

The ideal trustee doesn’t simply release money to beneficiaries. They protect the value of the trust while fostering family harmony. They are able to make tough calls and not bend rules at the urging of beneficiaries, with whom they may happen to socialize in casual settings. Too often, families find themselves considering poor choices: a willing trustee who lacks financial acumen or one who is ill-equipped to navigate family relationships.

A close family friend can be appropriate to handle simple trusts. But if you have complex business interests, ranching or farmlands, or a portfolio of diversified commercial real estate, you want a trustee who has expertise in those areas. For example, if a trust’s assets consist of 30 convenience stores built in 1962, you want someone capable of handling environmental remediation issues likely to impact the value of the trust or the skill set to hire someone who does.

Beyond expertise, common sense, and relationship skills, you want a trustee who can serve for the duration. An aged relation may well have financial and relationship skills, but is unlikely to serve in the role sufficiently long. Conversely, an institutional trustee could get caught up in corporate restructuring. One possible solution is to name co-trustees, so you have both an individual along with an institution to share responsibilities. They may bring complementary skills to the role. Don’t forget the importance of carefully naming successor trustees, those who are named to serve in the event the primary trustee is unable.

Can the Trustee be Changed?

A generation or two ago, trusts were often drafted by law firms who had cozy relationships with bank trust departments and who drafted documents that made it difficult to change trustees. These institutions didn’t want to give up the revenue, and it was common to have to go to court to remove a trustee. Today, trusts are typically drafted to provide flexibility and avoid having foxes guarding the hen house.

Still, what happens if you carefully chose a trustee but circumstances shifted? For example, Mom and Dad may have had a long history with a bank, knew the personnel and trust officer, and selected them as trustee. Down the road, the bank changes ownership. Because their trust value is below a certain financial threshold, they suddenly find themselves dealing with a 1-800 telephone number. Or they may find themselves shuttled off to a bureaucrat who didn’t know the family and is unequipped to have sensitive conversations.

Selecting a trustee is a bit like playing chess. To succeed, you need to think several steps ahead and anticipate circumstances that have not yet arrived. Choosing a trustee can be uncomfortable because it makes us ask a difficult question: Who do I think can best manage the affairs of the people I love most?