For many trust grantors, the process of selecting a trustee is often one of the most challenging aspects of setting up a trust. It necessitates a high level of confidence in the chosen individual’s ability not only to fulfill the grantor’s wishes but also to possess the necessary stewardship skills for safeguarding the trust’s assets.
The grantor faces the task of identifying someone willing to undertake the responsibilities associated with managing a trust. These responsibilities encompass various crucial aspects, including investing and overseeing assets, disbursing funds to beneficiaries, monitoring trust activities, representing the trust in legal matters, filing tax returns, and maintaining regular communication with all stakeholders. The trustee must further demonstrate technical knowledge, sound judgment, objectivity, integrity, and a commitment of time to effectively carry out the terms outlined in the trust.
Beyond these responsibilities, additional factors come into play when selecting a trustee. Considerations such as the size of the trust, its intended purpose and duration, the locations of beneficiaries, and potential tax implications all contribute to the grantor’s decision in designating a trustee.
When it comes to selecting a trustee, grantors typically have four options, each with its own set of advantages and drawbacks. Careful consideration is essential in making this decision:
Option 1: Family Member
Selecting a family member as a trustee can be appealing due to their familiarity with the grantor and family dynamics. However, potential downsides include the family member lacking the necessary skillset or time to effectively manage a trust, especially if it involves significant assets or has a lengthy duration. Additionally, a family member trustee may struggle to maintain the objectivity and impartiality that a third-party trustee could offer.
Option 2: Friend
Another option for a trustee is a close friend. Similar to a family member, a friend may have a good understanding of the family background, including the personalities and history of the beneficiaries. Opting for a friend as a trustee can introduce an element of neutrality, given that they are not a family member. However, it is crucial for the grantor to select someone with the requisite skills, time, and genuine interest in managing the trust effectively.
Option 3: Lawyer or accountant
A grantor’s attorney or accountant could also be a good choice for a trustee, especially since they have firsthand knowledge of the grantor’s legal or financial situation. However, one downside of going this route is that trust management fees could be higher than they would be if a friend or family member is selected. This could be especially true if the lawyer or accountant charges an hourly rate for their trustee services. Furthermore, while your lawyer may understand the legal issues of the trust, a lawyer trustee may not be as well versed in financial topics (such as taxes or investments) as an accountant, and vice versa.
Option 4: Corporate Trustee
The fourth option available to grantors is selecting a corporate trustee, typically offered by banks, trust companies, or investment firms. Corporate trustees often possess the necessary financial and legal expertise and resources required for effective trust management. However, there are potential downsides, including potentially higher trustee fees compared to individuals, formal processes for requesting distributions, and a potential lack of a deep understanding of the interpersonal dynamics among the involved parties.
Grantors also have a fifth option: choosing multiple trustees. This can involve naming more than one individual, or a combination of an individual and a corporate trustee, to jointly manage the trust. Such an arrangement allows for a diverse set of skills and perspectives in trust management.
It’s also advisable to designate a successor trustee, especially for trusts with a long time horizon. Several approaches to selecting a successor trustee exist, including specifying a list of successors in the trust document, establishing a methodology for beneficiaries to choose a successor, empowering beneficiaries to remove and replace a trustee, or giving authority to a third party (like a trust protector) to handle trustee changes.
Each of these options should be carefully considered in light of various factors. Professional assistance, such as that provided by CIBC Private Wealth, can be valuable in evaluating these options and determining the most suitable trustee type based on individual circumstances and preferences.