Your Estate Plan Advisors Want You to Choose a Trustee—Now What?

Estate planning involves deciding how your assets will be maintained and distributed after your death or in the event you become incapacitated. In addition to your financial wealth, your assets can include your homes, properties, vehicles, artwork, pensions, art collections, and life insurance policies.

Whether your reasons for planning an estate are to preserve your family wealth, provide for your surviving spouse and children, fund your grandchildren’s education, leave a legacy behind for a charitable cause, or all the above, you want your financial advisors to draft an estate plan you feel good about.

One crucial part of this process is choosing your step trustee. This article will share insights on how to make this important decision.

Key Components to Selecting Your Trustee

Once you have gone through the steps for determining how you want to distribute your wealth, your next decision is deciding who you will trust to carry out your legacy.

Although this selection may sound easy at first glance, it can be one of the most challenging parts of creating an estate plan. For example, the person you’d like as your first choice may not want the job. Or maybe you’re having second thoughts about whether a certain family member or friend is up for the responsibilities of the position.

Here are the key components to consider when choosing a trustee:

• The ability to act in the best interest of the trust, meaning helping the trust reach its goals and supporting families and various charities. Serving as a trustee sometimes creates competing risk-reward decisions.
• The versatility to adapt to the changing legal, tax, financial, and business climate. The right fit tends to be an individual or individuals who possess a combination of personality and expertise.
• The willingness to take on the duties and the liabilities associated with carrying out your goals. It is essential to ask a potential trustee if they want the engagement. This part of the equation is especially important when asking a friend or family member. We often find that the best fit is wary of the time it will take to carry out their duties or the liability they will shoulder as a trustee.

Should I Appoint an Individual, Corporate, or Professional Trustee?

Your next step in choosing a trustee is deciding if you would prefer an individual trustee, a corporate trustee, or a professional trustee to serve in the position. Let’s review what these different terms mean.

An individual trustee is typically a trusted friend or family member who usually receives no compensation for their role as trustee.

Many families want a family member or trusted friend because they hopefully have insights into the family dynamics that will help them make better, more thoughtful decisions. The challenge is a parent, sibling, or relative may have unexpected ambivalence that could lead to unintended conflict. Moreover, they may lack the knowledge and expertise to carry out their duties.

A corporate trustee is a registered legal entity incorporated with the sole purpose of acting as a trustee. Like any other company, the corporate trustee has shareholders and directors. In this case, however, the shareholders and directors control the distributions of the estate.

Corporate trustees have the experience, independence, and administrative platforms necessary to comply with the trust instrument, accounting idiosyncrasies, legal competencies, and family dynamics. However, there may be a higher fee for a corporate trustee, and the continuity of personal relationships can be difficult given staffing changes over time.

An independent trustee is a private, professional fiduciary who typically has business relationships with attorneys and accountants and has the expertise needed to manage a trust.

Between the previous types is the fledgling industry of the professional trustee. An independent trustee has often worked for a trust company as a corporate trustee, a trust and estate attorney, a CPA, a family office, or independently for a family, though they are now serving multiple families.

What About Trustee Liability?

Along with the duties of serving as a trustee comes a high level of personal liability. A trustee is personally liable for a breach of their fiduciary duties. These duties include the duty of loyalty, the duty of prudence, and subsidiary duties.

The duty of loyalty means that the trustee must manage the trust solely in the interest of its beneficiaries. Under the duty of prudence, the trustee must hold an objective standard of care in managing the trust property.

A trustee’s subsidiary duties include the duty of impartiality (among the beneficiaries), the obligation not to comingle the trustee’s personal property with trust property, and the commitment to both inform and account to beneficiaries.

How can we protect trustees so they can feel comfortable making difficult decisions? Here are two important options to consider.

• Indemnity agreement: An indemnity agreement is a legal contract that affirms that one party holds another party harmless from liability in a specific situation. This contract can provide some comfort to the trustee. However, in the event of a dispute, the trust assets may not be immediately available to provide a defense because of specific allegations.
• Trustee liability insurance: Trustee liability insurance, a type of errors and omissions (E&O) insurance, is another way to protect your trustees against claims brought by beneficiaries and other entities.

Working with an underwriter who understands trusts is critical to ensuring your trustee is adequately covered. Woodruff Sawyer has created an insurance program specifically geared to protect trustees, and our application process makes obtaining coverage easy. Learn more or reach out to your Woodruff Sawyer representative.