The Ins and Outs of Naming a Trustee

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If you establish a trust to hold assets for a beneficiary or beneficiaries, you’ll also need to name a trustee. Often, the choice is between a person, such as a trusted friend or family member, or a financial institution. The decision is important, because the trustee role carries significant legal responsibilities. The trustee must administer the trust for the benefit of the beneficiaries, in accordance with the terms set forth in the trust documents.

What are a trustee’s responsibilities?

The specific responsibilities and requirements of a trustee can become quite involved. For instance, even if experts are engaged to prepare tax returns, the trustee is responsible for ensuring they’re completed — and filed correctly and on time.

In addition, the trustee must accurately account for administering the trust, including investments and distributions. When moneys are distributed to cover a beneficiary’s education expenses, for example, the trustee should record both the distribution and the expenses covered by it. The beneficiaries can request an accounting of the transactions at any time.

The trustee needs to invest the assets within the trust reasonably, prudently and for the long-term benefit of the beneficiaries. And the trustee must avoid conflicts of interest — that is, he or she can’t act for personal gain when managing the trust. For instance, trustees can’t purchase assets from the trust. The reason? The trustee probably would prefer a lower purchase price, which would run counter to the best interests of the beneficiaries.

Finally, a trustee must be impartial. He or she may need to decide between, and balance, competing interests, while still acting within the terms of the trust documents. An example of competing interests might be when a trust is designed to provide current income to a first beneficiary during his or her lifetime, after which the assets pass to the second beneficiary. While the first beneficiary would probably want the trust’s assets invested in income-producing assets, the second would likely prefer growth assets.

What qualities does a trustee need to have?

Several qualities are key for an effective trustee, including a solid understanding of tax and trust law, investment management, and bookkeeping. Integrity, honesty, and the ability to work with all beneficiaries objectively and unemotionally are also important characteristics.

Moreover, some trusts continue for generations. Because of the sensitive responsibilities assumed by the trustee and the length of time over which some trusts extend, many legal and financial professionals recommend engaging a corporate trustee, such as a bank or financial institution, rather than asking a friend or family member to take on this position.

Naming a friend or family member as a trustee may seem appealing because it appears to be a way to reduce, or avoid, the fees associated with an institutional trustee. But it’s important to recognize that taking on the responsibilities of a trustee requires an investment of time, energy and expertise. Trustees deserve compensation. Even if trust documents don’t provide a fee for the trustee, many states allow for a “reasonable fee.”

What are the ramifications?

To be sure, it’s only prudent to obtain a solid grasp of the fee, and to understand what services are included within it, before engaging a trustee. But trying to avoid a trustee fee may backfire.

Naming a trustee is an important decision, as this person or institution will be responsible for carrying out the terms outlined in the trust documents. Your accounting professional can help you weigh the options available to you

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