Trust protector

A trustee of a trust is a fiduciary with a legal duty to act in the best interest of the trust beneficiary or beneficiaries in accordance with the terms of the trust.

The choice of trustee is an important one, which is why it should not be an afterthought when drawing up the trust instrument. The right trustee can ensure the grantor’s (aka settlor’s) wishes are carried out and help create a positive legacy for future generations. The wrong trustee can deviate from the grantor’s wishes and intent, stoke conflict among beneficiaries, and mismanage trust assets – sometimes to the point of criminal wrongdoing.

Here are some things to consider when choosing a fiduciary, plus some different options for your trust.

Family Friend or Corporate Trustee?

The choice of trustee often comes down to a choice between a family friend/relative or an unrelated corporate trustee. Both have their pros and cons.

The Family Friend/Relative as Trustee: Pros and Cons

Many grantors choose a trusted family member or friend for this role.

One main advantage is cost. The trustee is entitled to compensation as detailed in the trust instrument or, potentially, “reasonable compensation” under state law. This can be a set hourly rate or a small percentage of the trust assets (often below 1%) annually. Many trustees waive the fee altogether, especially if administering the trust is not too time consuming and challenging.

One disadvantage is that if the trust is time consuming and challenging, a family friend may not have the skills and experience. A trustee needs to know all relevant legal and tax matters to stay in compliance and may have a large job in terms of investing, managing, and distributing trust assets. Additionally, non-corporate trustees are not required to be bonded and insured like corporate trustees are, leaving assets more vulnerable to mismanagement and misconduct.

Succession planning can be a challenge, too. The trustee will eventually die or may step away from the role sooner due to illness, incapacity, or any number of other personal issues. The grantor must consider how a successor would be chosen in this circumstance.

Finally, consider the personalities, relationships, and interpersonal dynamics of the parties involved. Having someone who knows the grantor and beneficiaries personally can be a pro or a con depending on the particular situation. On the one hand, he or she may have valuable insights into the grantor’s values, wishes, and intent, and the individual needs and potential issues of the beneficiaries, because of those personal relationships. This can be a big benefit that corporate trustees simply can’t replicate.

On the other hand, this could work against the trustee. Beneficiaries may try to take advantage of their personal history with the trustee, the trustee could treat beneficiaries unfairly due to personal biases, or previously good relationships could be strained.

Whether the personal relationship is a pro or con is highly dependent on the individual personalities and relationship dynamics of the beneficiaries and trustee.

The Corporate Trustee: Pros and Cons

Another common option is the corporate trustee, where a financial institution is the trustee, and individual employees carry out the day-to-day duties of administering the trust.

One main advantage of choosing a corporate trustee is that you know the individuals involved have the skills and experience needed to manage and administer the trust. They are aware of all the legal and tax implications and obligations and can handle them, even if the trust is complex and time consuming.

Corporate trustees are also regulated by state and federal authorities, providing a level of protection you don’t have with non-professional family/friend trustees. Corporate trustees are bonded and insured against fraud, theft, misconduct, and errors and omissions.

Another benefit is the ease of succession planning; even if individual trust officers or advisors leave the role, another one takes over, providing continuity over time.

The biggest downside of choosing a corporate trustee is often the cost. A corporate trustee will not waive the fee, which is often a small percentage of the trust assets annually plus fees and expenses for any additional services. This can add up to a sizeable amount every year.

Finally, consider the lack of insider knowledge and personal relationships with the grantor and the beneficiaries. Again, whether this is a pro or con is a matter of individual personalities and relationships. An impartial corporate trustee could be ideal in certain situations, while in others, a trustee with personal knowledge could better carry out the spirit and intent of the trust.

Questions to Consider When Choosing a Trustee

If you’re considering creating a trust, here are some questions to consider when it comes to choosing a trustee.

• Does the trustee understand my intent as the grantor, and can he or she help carry out that intent?
• Is the trust so large and/or complex that it should be administered by a professional with experience? Or is it straightforward enough for anyone to manage?
• Knowing the personalities and relationship dynamics of the beneficiaries, is it wiser to have a trustee who is impartial or one with a personal touch?
• For family friend/relative trustees:
  • Does he or she have a good relationship with the beneficiaries? Is he or she good at resolving conflict, dealing with different personalities, and saying “no” when necessary?
  • Does he or she have the time necessary to administer the trust? Does he or she have the required knowledge about compliance, taxes, and investing to carry out the job effectively?
  • Is he or she reliable? Trustworthy?
• For corporate trustees:
  • What experience does the individual/team administering the trust have with similar trusts?
  • If the company is bought out or merges with another company, how does that affect continuity?
  • What are the fees? Are additional services (such as litigation support, tax preparation, etc.) available, and how are they billed?

Speak with your estate planning attorney to come up with questions that are pertinent to your unique situation.

Additional Options for Your Trust

As the grantor, you are not stuck in an either-or position. You have options beyond having either a corporate trustee or a family friend serve as trustee, including:

Appoint a combination of both. With both types of trustees, you get the best of both worlds. The corporate trustee has the impartiality, experience, and time to properly administer the trust. The family friend/relative trustee has the personal connections and knowledge to ensure the trust is being administered according to the grantor’s wishes. The downsides: this is probably more costly (unless the family friend waives the fee) and could lead to clashes between the two trustees if the trust is not clear about the roles of each trustee.

Appoint a trust director*. A trust director is an individual with a specific role as described by the trust. For instance, a trust director may be solely in charge of managing the investment of assets but have nothing to do with making distributions or handling compliance. The trust director works alongside others to manage the trust. Read more about trust directors here on our blog.

Appoint a trust protector*. A trust protector is an individual whose role is to ensure that the trust is being administered according to the terms of the trust and the wishes of the grantor. He or she is not involved in asset management or day-to-day handling of the trust but has a more supervisory role. Read more about trust protectors and when it’s smart to have one here on our blog.

*These terms are sometimes used interchangeably.

Require Trustee to Be Bonded and Insured. A family friend or relative is not required by law to be bonded and insured, but the trust instrument can require it, providing an extra layer of protection.

Create a Private Family Trust Company (PFTC). Creating a PFTC is a viable option for ultra-high-net-worth families. PFTCs allow for more privacy, better continuity over time, and more input from family members (as members of the company) on how to administer the trust. The company itself is a fiduciary and acts as trustee. The downsides: PFTCs are expensive to maintain and are currently not recognized by all states.

Make the Trust Flexible Enough for the Future. Understand that things will change over time, and a trust should be flexible enough to adapt to uncertain future circumstances. Include provisions on replacing a trustee such as when replacement can or must happen and who has the authority to select the replacement.

Legal Help and Strategic Advice from Gem McDowell

Trusts may seem simple on the surface, but with many kinds of trusts, many potential pitfalls, and changing laws and tax regulations, they can quickly become complicated. Avoid mistakes and get strategic advice from estate planning attorney Gem McDowell of the Gem McDowell Law Firm with offices in Myrtle Beach and Mt. Pleasant, SC.

Gem and his team help individuals and families in South Carolina create estate plans that reflect their unique circumstances to protect what they love and bring peace of mind. Whether you need help creating or reviewing a trust, choosing a trustee, or developing a custom estate plan from scratch, Gem can help. Call 843-284-1021 today to schedule your free consultation.