A Trustee You Can Trust
Trusts are meant to protect your assets and the loved ones you leave behind.
But before finalizing that trust, you need to select who will be responsible for carrying out your requests when you’re gone.
Rather than picking someone right off the top of your head, I suggest you begin the process by writing a letter to the prospective trustee. Doing so will help you wrap your head around all the different moving parts involved.
So let’s imagine you’ve died and are looking down and telling your trustee what to do…
We should begin with overseeing the assets in the trust.
Will you be leaving a complex stock portfolio consisting of dozens of investments with several brokers?
Would you want the trustee to keep those investments or consolidate everything to a single index fund at one brokerage firm on behalf of your beneficiaries?
Here’s a hypothetical example of some very specific responsibilities regarding a trust’s portfolio:
To the trustee and successor trustee the xxxtrust dated xx/xx/20xx:
I desire that all assets held in the trust be invested in the xxxx S&P 500 index fund (ticker symbol: xxxx) with all dividends and capital gains automatically reinvested. If this fund isn’t available, all money should be invested in a similar large-cap growth mutual fund with xxxx or xxxx with an expense ratio not to exceed 1%.
The point here is that the more specific you are, the less chance of confusion when the time comes.
The trust will also need to file an annual tax return. So unless the prospective trustee is a CPA or qualified tax preparer, include a provision allowing the trustee to pay for such services from trust assets.
If you have business and real estate holdings, the trustee should have experience with those assets, too. And what do you want done? For example, should the trustee liquidate or hire a manager to keep them within the trust?
Now onto whom you want to protect…
Suppose you handle all the finances and household chores, and your spouse is the beneficiary of the trust.
Will the trustee need to pay the bills, hire someone to do the home upkeep, arrange for their medical care?
Have you taken steps to safeguard your grandchildren’s IRA inheritance with an IRA trust?
Do you want the trustee to follow strict guidelines on the distributions?
Or will they have the responsibility of using their discretion, which could mean getting pressured by the beneficiaries for money?
Do you have an incentive trust for an adult child who has a poor history with managing money or a drug problem?
Will your trustee need to make decisions on when to distribute money to him?
Or have you specified exactly how much and under what conditions distributions be made?
Here’s another part of the hypothetical letter to the trustee:
Prior to making a distribution to a beneficiary younger than 25, the trustee shall order a drug test for that beneficiary. If the beneficiary tests positive for xxx, distributions shall be withheld until said beneficiary completes an approved drug treatment program acceptable to the trustee.
As you can see, the trustee might need a strong combination of experience and steadfastness.
So now that you have a better picture of all that the job entails, you’re ready to ask who can actually fill the position…
The brightest child of the litter is one option.
For example, out of your three children suppose one has financial skills. You’ve had family meetings and all agree that she should be the trustee and manage the assets for your surviving spouse along with discretionary distributions to the three children.
But when the time comes, will the two children who aren’t trustees feel out of the loop? Will they accuse their sibling of spending the inheritance on herself, investing trust money foolishly, or unnecessarily withholding distributions?
“Never,” you say.
The sad truth is that when death is compounded by a sudden influx of wealth to manage, the best of families have ended up in court, especially if prodded by aggressive lawyers.
So be realistic with your assessment of a potential trustee’s skills. Consider their feelings, and those of the beneficiaries when asking if they would be interested in the job.
And suppose the child you picked gets sick, dies, or otherwise can’t or is unwilling to do the job?
Consider her age.
How old will she be in 10, 20, and 30 years?
In the end, you might hate to burden a family member or friend with managing a trust.
So you might name a corporate trustee instead. Or appoint an institution as a contingent or co-trustee. That way there’ll be two parties watching over the trust.
A corporate trustee manages trusts as part of their daily business. They’re up-to-date on tax laws, planning strategies, and their legal responsibilities.
And unlike your lawyer, CPA, or close friend, corporate trustees never get sick, go on vacation, or die.
Of course, the big players want to know that there will be at least several million to make it worth their while.
If you’re not in that category, talk to your local banker. Privately owned banks often serve as trustees for smaller estates.
Some of the low-cost mutual fund companies also offer trust services for estates of moderate size.
However, using a corporate trustee isn’t without downsides…
They tend to take the committee approach for making decisions. Cutting through the red tape of multiple departments to find someone to help with a problem can be frustrating for beneficiaries.
And once a good contact is established, that person might leave the company or get promoted. Then the beneficiaries are once again stuck trying to find another helpful employee.
To sum it up, along with your attorney, write a detailed “Letter to the trustee” on how to handle trust investments and distributions for your beneficiaries once you’re gone.
That way you’ve removed a lot of the control, and burden, from the trustee and left them with the responsibility to execute your exact wishes without having to try and interpret your desires.
Then you can spend the time to carefully select the person or institution that will be responsible for protecting the trust’s capital and your loved ones.
To a richer life,
Editor, The Rich Life Roadmap