An important part of many estate plans is a trust, which is formed under state law. The purpose of a trust is to ensure a smooth transfer of your assets to your chosen beneficiaries after you’re gone. People set up trusts to manage taxes, protect their assets from creditors, use their money to support their family members and/or donate money to charitable causes.
There are many different types of trusts, and each type serves important purposes. We will work with you to figure out which is appropriate for your situation.
The two basic types are revocable trusts and irrevocable trusts. Within each category are various types of trusts that serve specific needs.
Revocable trusts, also known as living trusts, are more common than irrevocable trusts because they tend to be more flexible. A revocable trust is an estate-planning tool that allows you, as the grantor, to alter or cancel its provisions during your lifetime. Having this trust in place allows your heirs to bypass the long, complicated probate process after your death, as well as guardianship or conservatorship proceedings. During your lifetime, you can change instructions, remove assets from the trust or terminate it.
In contrast, you cannot change an irrevocable trust. Assets you place inside it cannot be removed by anyone for any reason. The purpose of an irrevocable trust is to move your assets out of your control. This protects the assets from creditors’ claims, and it reduces the value of your estate, which lowers estate taxes.
Regardless of the type of trust you establish, it is extremely important that you choose your trustee wisely. A trustee is a person who serves as the custodian for the assets you hold in your trust. That individual is responsible for managing and administering the finances of in your trust according to the instructions you have given.
You can be the trustee of your own trust until you can no longer manage it due to incapacitation or death. At that point, your successor trustee takes over. Managing a trust is a big responsibility, so you want to choose a person (anyone over the age of 18) who can manage those duties well. They include recording expenses and income, distributing funds to beneficiaries, filing taxes on any income the trust makes and keeping record of all transactions.
Choose someone who is honest, trustworthy and has your best interests in mind.
It’s also important to choose a trustee who has either enough personal wealth or enough insurance to cover potential liabilities. Sometimes, trustees do not act in the best interest of the named beneficiaries. The trustee you choose needs to have the resources and ability to protect your trust from poor decisions. A trustee can be held personally liable if he or she does not act in accordance with fiduciary standards. In fact, the courts have the authority to surcharge trustees for breaching their fiduciary duties. If that happens, it’s important for the trustee to be able to cover that surcharge.
Here are four potential choices for trustees who are likely to manage your trust’s assets responsibly.
1. A close family member
In many cases, it makes sense to choose a family member to be your trustee. That close relative knows you well and is likely to act in your best interest. However, this isn’t always the case. Family dynamics can be complicated. We’ve seen some situations in which family tension created barriers to a smooth transition of assets. Sometimes these divisions are obvious, but in some cases, no one realizes that hard feelings are lurking beneath the surface until a family member dies.
This is why it’s important to talk to family members as you’re in the process of setting up a trust. Try to unearth any resentment or dissention before you choose a trustee. In some cases, the very act of naming a family member as your trustee can cause other family members to feel overlooked, and resentment can result.
2. A friend
Some people avoid family drama by choosing a close friend to be their trustee. This can be a wise strategy as long as that friend is willing to accept the significant, long-term responsibility of managing your trust. However, family members sometimes resent the fact that someone outside the family is managing a loved one’s trust, and this can cause animosity.
If you want to name a friend as your trustee, again, talk with your family about it first. Explain your intentions. Allow them to express their feelings about your choice. Doing this in advance might shield your friend from some of the resentment he or she might experience from your family members.
3. A neutral third party
If you don’t have a family member or friend who is likely to be a great steward of your trust — or if you want to avoid the family/friend drama — you can choose a neutral third party to be your trustee, such as your attorney or financial advisor.
If you have a close working relationship with such a professional, he or she is likely to have insight into your family dynamics. This can be a good solution, but the downside is that it will cost money to hire someone to be your trustee. Explore your options before making this choice.
4. A trust company
You might also want to consider hiring a trust company, although this also involves a fee. However, that will be money well spent, especially if you anticipate any dissention among family members and friends.
Like your attorney or financial advisor, a trust company will be able to make decisions about the management of your trust based solely on the parameters you have laid out, without emotion or personal interests interfering with the process. They are more likely than family members or friends to act in an unbiased, objective manner.
One downside to this option is that once you’ve hired a trust company, it can be difficult to end the relationship. Ask a lot of questions before signing a contract!
There are many benefits to hiring a corporate trust company, however. Because they specialize in managing trusts, they have the resources needed to administer your estate properly. Their staff members are experienced in managing trusts and will be readily available to answer questions, look up transactions and offer guidance. Trust companies also have well-established relationships with other professionals, such as CPAs and estate attorneys, whose expertise is likely needed in managing your trust.
Also, professional trustees have to conduct business in accordance with state regulations and oversight. This provides an extra level of assurance that the company will administer your estate in accordance with your wishes and according to the fiduciary standards of care and duty.
You can choose to name co-trustees — one individual and one corporate entity — to manage your trust. This option can enable you to benefit from the upsides of both. Also consider naming a successor trustee, who will take on the responsibility of managing your trust if something happens to your original trustee.
Choosing the right trustee is just as important as creating the trust itself. Whether you appoint a family member, friend, professional advisor, or trust company, the person or entity you select will play a central role in carrying out your wishes and protecting your legacy. Take time to evaluate the strengths, limitations, and potential implications of your choice.
And remember: this decision doesn’t have to be made alone. We’re here to help you assess your options and choose a trustee who aligns with your values and goals.
