This the fifth and final segment of our Choosing the Right Fiduciary series where we cover trustees.

Trustees are best saved for last because their duties often overlap with the duties of agents under powers of attorney and health care powers of attorney, as well as executors. Yet, naming a trustee is unlike these other positions because a trust is an incredibly flexible document. Before diving into the substance of this post, a few key terms to note:

Grantor/Settlor: The person who creates the trust.

Beneficiary: The person whom the trust assets are meant to serve.

Revocable vs. Irrevocable: Trusts can be either revocable or irrevocable. In a revocable trust, the grantor has full power to amend or revoke the trust during his or her lifetime. An irrevocable trust, on the other hand, cannot be revoked or amended by the grantor once executed. This distinction is important because the tax treatment of these two types of trusts can differ and, in some cases, only certain people can be named as trustee.

Trusts may be created to achieve many different goals. One of the most common trust arrangements is a revocable trust created by the grantor to serve as a will substitute. The grantor serves as the trustee of his or her revocable trust during the grantor’s lifetime. He or she may title assets in the name of the revocable trust and may name the revocable trust as the beneficiary of insurance policies or retirement assets. If the grantor becomes mentally incapacitated, the successor trustee is authorized to step in and manage assets on behalf of the grantor. Therefore it is desirable to name a trustee who will coordinate well with the agent named under the grantor’s power of attorney and the grantor’s health care agent. Clients often name the same person to serve in all three roles, which creates efficiency. However, be aware that the more “hats” a fiduciary is wearing, the less oversight there is over his or her actions. As has been stated throughout the series, absolute confidence in the named trustee’s abilities and integrity is paramount.

At the grantor’s death, the trust becomes irrevocable and functions like a will – it directs assets to the grantor’s desired beneficiaries, often outright. In this scenario, the clients frequently name the same person to serve as executor and trustee because the primary purpose of the trust is to direct assets at the grantor’s death. The trustee’s responsibilities – locating heirs, distributing assets, etc. – are often very similar to the duties of an executor, but without the government oversight and reporting requirements.

If assets are directed to be held in continued trust, the trustee’s role more closely resembles that of a guardian of property. The trustee manages assets for the beneficiary, according to prescribed terms in the trust about how the assets should be used and when distributions should be made or withheld. In this case, the right person to serve as trustee would be familiar with the beneficiary’s potential needs and obstacles. Clients often name a guardian or other close relative to serve in this role because he or she is in a strong position to observe and interact with the beneficiary. A trustee who is named to serve for a trust with multiple beneficiaries has the special challenge of weighing each beneficiary’s needs and avoiding preferential treatment of current beneficiaries over remainder beneficiaries (unless the trustee is specifically directed otherwise by the terms of the trust). Trustees should also be strong decision makers, because beneficiaries may have opinions about the desired frequency and amount of distributions that the trustee considers inappropriate or ill-advised. Many clients also prefer to name trustees who share the clients’ values (particularly if assets are held in trust for their children) so that those values may be passed on in the clients’ absence.

Though great consideration must be given to a trustee’s relationship with beneficiaries and ability to understand the grantor’s intent while also weighing the beneficiaries’ needs, the trustee role also requires proficiency in managing assets. Beneficiaries are entitled to annual accountings of trust activity, so it is best to name trustees who are reasonably savvy when it comes to finances and record-keeping. One way to accomplish both goals is to name co-trustees with different strengths who can work together, including professionals or individuals with a financial background. The trustee is responsible for filing tax returns on behalf of the trust, which can be complicated and time consuming depending on the nature and purpose of the trust itself. Finally, keep in mind that for some types of irrevocable trusts the class of people who may serve as trustee is limited if the desired tax result is to be achieved.

When the right person is serving as trustee, trusts are incredibly useful tools that can accomplish a wide variety of objectives. The best choice of trustee will depend upon the goals of the grantor, the potential needs of the beneficiaries, the assets to be managed, and other circumstances particular to each trust.

We hope you have enjoyed the Choosing the Right Fiduciary Series. Contact us today to learn more about creating an estate plan and selecting the best people to manage it.

Below are links to the four earlier articles in our Choosing The Right Fiduciary Series, if you missed them:

1. CHOOSING THE RIGHT FIDUCIARY

2. CHOOSING THE RIGHT FIDUCIARY: FINANCIAL POWERS OF ATTORNEY

3. CHOOSING THE RIGHT FIDUCIARY: HEALTH CARE POWERS OF ATTORNEY

4. Choosing The Right Fiduciary: Executors

Jennifer Schooley | Contact | Estate Planning

The importance of choosing the right people to fill fiduciary roles cannot be overstated. The word “fiduciary” derives from the Latin verb fidere – to trust – and it is true that individuals named to these roles should have the highest level of trustworthiness. Ideally, however, the people serving as fiduciaries should also possess the necessary skillset to successfully perform the tasks required. Because the responsibilities in each role are somewhat different from the others, taking the time to think through whether a potential fiduciary’s skillset and personality are compatible with the role is well worth the effort. Here is an overview of each role, which will be followed in subsequent posts with more detail about each particular one.

An agent under a power of attorney may manage your finances on your behalf during your lifetime. Agents are often granted nearly unlimited powers to carry out any action you might undertake for yourself. Unfortunately, this broad power is sometimes abused, so trustworthiness is the absolute guiding star when choosing an agent. Another important factor is attention to detail. Investment, banking, bill payment, and other records of actions should be maintained. This person may also be tasked with voting on (or otherwise controlling) your business affairs. Thus, it may be easier for an agent who lives locally and has intimate knowledge of your affairs to act on your behalf.
By contrast, an agent under a health care power of attorney is empowered to make decisions about your body. If you are unable to make or communicate a decision about your own medical care, your agent is named to make those decisions. Thus, this person becomes your advocate. The person named should be familiar with your values and your wishes, and if necessary, be assertive enough to ask the right questions of medical professionals. Finally, it is helpful (but not essential) to name someone with medical experience and who is local. If you are in an assisted living or a nursing care facility, your agent is the facility’s main point of contact.
An executor is appointed to wrap up your affairs after your death. This begins by qualifying before the circuit court clerk and may include preparing an inventory of your assets at your death and an accounting showing payment of your debts, receipts by your estate, and distributions to your beneficiaries. Your executor is also obligated to file your final income tax return. Strong organizational skills are critical to this position because record-keeping, meeting probate deadlines, and making tax elections and filings are key aspects of the job. Weeding through and selling, distributing, or donating household contents is also a major function of the job, and it’s no small task. If the executor is not a resident of the state, this task is more cumbersome. In addition, the court may require that the executor be bonded.
A trustee is put in place to manage money for the long-term benefit of the trust’s beneficiaries. The person in this position must be prepared for a commitment and possess either a talent for asset management or the ability to assess information provided by a competent professional who is hired. Consider naming someone who has a sense of your values and the beneficiaries’ needs, so that if the trustee is called upon to make discretionary distributions, he or she has a solid foundation from which to consider the issues. Often the interests of beneficiaries conflict, so your trustee may be tasked with making difficult choices.

Naming the wrong people to these fiduciary roles can cause even a well-constructed estate plan to fall apart. Your attorney can help you identify individuals in your life who would be a good fit for each role, but your knowledge of both the character and judgment of the people you choose is paramount. If you lack confidence that people in your life have the talent or character required of the job, choosing a professional trustee may be the better course.

Jennifer Schooley | Contact | Estate Planning