Choosing the Right Trustee, and Why it Matters

By Royce Ramey, CFA^®, Co-Chief Executive Officer

Trusts are a powerful tool for families to transfer their wealth and help achieve other financial goals, such as asset protection and privacy. However, one of the most important —and often overlooked —decisions when creating a trust is selecting the right trustee.

Each trust needs a trustee to make the decisions governed by the trust document. Serving as a trustee is a significant responsibility that requires time, specific skills, knowledge and dedication. Selecting a trustee well-equipped to handle these duties is one of the most important decisions the person setting up the trust—aka the grantor—can make.

A trustee’s responsibilities are multifaceted. As fiduciaries, trustees are charged with managing trust assets, making distributions according to the trust’s terms and adhering strictly to the grantor’s intent and the language in the trust agreement. Trustees must have expertise in investing, tax planning and tax return preparation, as well as the ability to understand legal documents. To the extent a trustee does not have this expertise, they can hire professionals to assist them.

Throughout my career advising multigenerational families, I’ve seen firsthand how the selection of a trustee can either preserve or erode a family’s legacy. At Versant Capital Management, I help families navigate complex estate planning decisions as part of our comprehensive family office services. Yet, too often, choosing the right trustee is an afterthought, when in reality it can profoundly shape the outcomes and dynamics of a trust for years to come.

Distribution Decisions
An important role of the trustee is making distribution decisions. A trustee is holding assets for the beneficiary’s benefit, and he or she must distribute those assets as the trust document lays out. The trustee must interpret the trust document’s provisions carefully so that distributions align with the grantor’s intentions. This decision-making process can require balancing the needs of current beneficiaries with those of future generations, a task that demands fairness and foresight.

Grantor’s Intent
The trustee’s understanding of and commitment to the grantor’s intent are equally important and at the heart of what it means to be a trustee. A trustee should demonstrate a deep familiarity with the grantor’s values and priorities so that their decisions reflect the spirit of the trust’s mission. Exercising sound discretion while remaining faithful to the grantor’s wishes is a delicate balancing act that requires insight and judgment.

For example, consider a situation where a trust names two beneficiaries with very different financial circumstances. A thoughtful trustee would need to understand the grantor’s intent. Did they want distributions to be equal regardless of each beneficiary’s needs, or did they want the trustee to consider each individual’s financial situation when making distribution decisions? Interpreting and honoring that intent is a core part of the trustee’s role.

Relationship With Beneficiaries
The relationship between the trustee and the beneficiaries is another important factor to consider. Trustees must approach this relationship with sensitivity and impartiality, building trust and addressing any conflicts that may arise. An effective trustee is skilled in conflict resolution and adept at maintaining open communication while prioritizing the trust’s objectives. Balancing empathy with objectivity is key to ensuring that all beneficiaries feel their needs are considered fairly.

Relationship With Beneficiaries
The relationship between the trustee and the beneficiaries is another important factor to consider. Trustees must approach this relationship with sensitivity and impartiality, building trust and addressing any conflicts that may arise. An effective trustee is skilled in conflict resolution and adept at maintaining open communication while prioritizing the trust’s objectives. Balancing empathy with objectivity is key to ensuring that all beneficiaries feel their needs are considered fairly.

Trustee Options
Grantors can choose from a few different types of trustees, each with distinct advantages and challenges.

Individual trustees are often family members or trusted friends who bring personal knowledge of the family’s dynamics and a strong alignment with the grantor’s values. However, they may face challenges such as conflicts of interest, a lack of expertise in complex financial or legal matters and limited availability. Additionally, the finite lifespan of an individual trustee necessitates careful succession planning to maintain continuity.

Corporate trustees, on the other hand, are professional institutions specializing in trust management. They offer a high level of objectivity, efficiency and expertise, with teams of specialists in the legal, tax and investment fields. Their unlimited lifespan eliminates concerns about succession, providing long-term stability for the trust. However, corporate trustees may lack the personal connection to family dynamics that an individual trustee might provide.

Co-trustees can combine the strengths of individual and corporate trustees. By pairing an individual trustee’s family insights with a corporate trustee’s professional expertise, co-trustee arrangements balance understanding family relationships with ensuring effective administration. While this approach offers significant benefits, it also requires careful coordination and communication to avoid conflicts or inefficiencies between co-trustees.

Questions To Ask
When evaluating potential trustees, grantors should consider several key questions:

•  Does the trustee have experience managing trusts of similar size and complexity?
• How will they handle conflicts among beneficiaries?
• What steps will they take to maintain compliance with the trust’s terms and the grantor’s intent?
• How will they manage investments and distribution decisions?
• Can they dedicate sufficient time and attention to the trust’s needs?
• What fees will the trustee charge?

Asking these questions can help you determine whether a potential trustee possesses the necessary expertise, judgment and capacity to fulfill their fiduciary responsibilities effectively.

Whether appointing an individual, a corporate institution or both, grantors should weigh their options carefully. By making a thoughtful and informed choice, grantors can safeguard the trust’s purpose and promote harmony among beneficiaries.

This article originally appeared on Forbes.com.

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