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Picking a trustee is daunting, even for wealthy clients. Since trustees control everything, the decision is crucial.
Let’s imagine you are embarking on a two-week voyage across rigorous waters. Before you start, you get to choose the captain of the ship. Here are your options:
- Captain 1: Took a three-hour course on how to steer a boat and just received their license this morning.
- Captain 2: Does not have a license, is a family friend and you haven’t been on a boat with them before.
- Captain 3: 15 years of professional ship captain experience and has traveled around the world five times.
For grantors and beneficiaries of a trust, they can choose the captain of their ship. However, picking a captain/trustee is not a time for fun and excitement. The trust document plays a crucial role in outlining what can and cannot be done.
Here are two very important things to look for and/or include inside your trust document:
- Language to remove and appoint a trustee
- Ability to change the governing law
There are many reasons to why having this specific language is important. If your trustee is doing an egregious job, you want the option to make a change. Specific language like this offers beneficiaries control and choices.
A trustee’s job is to follow the rules outlined in the trust document. This job gives the trustee a lot of power, such as how much and when assets are distributed, investments inside the trust, complex accounting, and following the administration rules of the document.
Here are seven considerations for choosing a trustee:
1. Individual or trust company?
There are many pros and cons to choosing an individual versus a trust company. Do you want them to charge a fee? An individual usually does not, but a trust company does. An individual trustee can play favoritism with distributions, but a trust company legally cannot. Trust rules, such as taxes and legal laws, change. An individual’s focus is not on those changes. A trust company’s focus is constantly on those changes. Appointing an advisor or attorney could be a conflict of interest and cost more.
2. Which type of trust company?
If you decided to go with a trust company, there are a few different types. Do you want an advisor-friendly trust company or a bank trust company? A bank trust company provides trust accounting, trust administration, executor services, and invest the trust assets. An advisor-friendly trust company provides trust accounting and trust administration but delegates the beneficiary or grantor to choose the investment advisor.
3. Governing law
The top-ranked states for trust law are South Dakota, Delaware, and Nevada. If you are not using a trust company with the best trust laws, then you are basically buying a Ferrari without being able to afford the gas. Here a few benefits of South Dakota, for example:
- Privacy laws — South Dakota does not require trust documents to be filed publicly. Updates or changes to a trust do not need to be filed with a South Dakota court.
- Directed and delegated trusts — South Dakota legal trust statutes allow the creators of a trust to direct or to delegate the trust company to follow the investment choices and asset allocation decisions of an outside advisor.
- Asset-protection trusts — South Dakota has enacted legislation which prohibits judicial foreclosure and creditor attachment on beneficial interests in trusts, powers of appointment held by beneficiaries, and reserved powers by a beneficiary.
- South Dakota allows for changes to be made within a trust, called decanting, in a natural and easy way. Changing beneficiaries or the distribution amounts are not allowed unless all beneficiaries agree to the changes. South Dakota was ranked as the #1 trust state for decanting rules.
4. Investment management
Does your trustee invest trust assets? Earlier, I mentioned the difference between a bank trust company and advisor-friendly trust company. If you have a financial advisor, but use a bank trust company, the bank will manage the assets, not the advisor. If you use an advisor-friendly trust company, then you can choose your financial advisor to manage your trust assets.
5. Continuity and protection
Continuity is key to protecting a legacy. When choosing a trustee, understand the steps they will take to insure whether your trusts last five, 10 or even 100 years! They should have the capacity and necessary plans in place to continue to serve you and your future beneficiaries.
6. Multiple trustees
Sometimes the best answer can be to choose more than one person to serve as co-trustee. You can choose an individual (son, daughter, spouse etc.) to serve with a corporate trustee. This can help balance trust accounting, administration, and investments with other trustee duties.
7. Fees
Finally, understand what you are paying for. Know the trustee costs and the services offered. Some cost may be mandatory (trust administration, accounting, etc.) and others may be optional. You can ask to separate fees such as trust administration from investment management. You have choices and there are many firms out there that will negotiate fees.
Even the best-structured trust documents face extreme difficulties because the time was not put in with choosing a trustee. Take time and consideration when choosing the captain to protect your legacy.
Antoine Burrell is a senior associate at Wealth Advisors Trust Company, an advisor-friendly trust company. He can be reached at [email protected].
Read more articles by Antoine Burrell
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
