Trusts are powerful estate planning tools, particularly when you’ve worked with California estate planning attorneys to draft your trust who walk you through the benefits of the trust that you selected. In certain trusts, such as a revocable living trust, you may name yourself as the trustee and handle all of the administration of that trust from that point. However, there are some circumstances that require you to use someone else as a trustee or be prepared to appoint someone as a trustee to step in if you are unable to serve or after you pass away.
Why Use Trustees?
Trusts are a valuable way to transfer wealth and accomplish other financial goals for your family. Naming a trustee is important so someone is responsible for administering the terms of your trust and communicating with beneficiaries. While this can be seen as an honor, it is also a responsibility that requires time and care depending on the complexity of the trust and the type of assets you have inside.
If you do name yourself as trustee, you still need someone named as a successor trustee if something happens to you. If your trust will continue after you pass away, you certainly need to name someone to take on this key role.
What Are the Duties of a Trustee?
A trustee is responsible for managing the trust faithfully and responsibly, investing and distributing trust assets, keeping accurate records, and complying with any state and federal tax laws or other regulations. This is one of the most important decisions you’ll make when creating a trust, so it is worth taking some time to think through your options and possibly even discuss with your estate planning attorney who you intend to name as a trustee.
What Qualities Make for a Good Trustee?
It’s true that a trustee may need to manage or invest assets, so financial awareness and familiarity with your wishes and the trust term are helpful. However, a trustee should also have some other skills, including:
- Comfort communicating with beneficiaries
- Enjoying the administrative and financial component of trustee work
- Ability to keep good records
- Ability to make discretionary decisions
Does a Trustee Need to Have Experience?
Trustees are fiduciaries, which means they are legally obligated to act in the best interests of the beneficiaries. In California and throughout the country, trustees are expected to perform their duties with skill and care, irrespective of their prior experience in the role. This fiduciary responsibility involves not only adhering to the trust’s terms and applicable laws but also ensuring that beneficiaries are informed about trust activities while maintaining confidentiality from outside parties.
The obligation to administer the trust must comply with the terms of the trust and the specific language inside, which means that a trustee has to do more than simply follow directions. They may have to make subjective decisions as their management of the trust unfolds, whether it’s distributing assets to beneficiaries, how to invest assets inside the trust, or limiting access to certain beneficiaries if and when the situation calls for it.
How Should Trustees Invest?
Assets not being distributed should normally be invested in line with specific criteria, such as the mission of the trust and its duration. Overseeing the investment strategy falls under the domain of the trustee’s responsibilities, which requires more than a deep understanding of asset classes and financial markets. In some cases, trustees might also work with outside professionals to make sure they have selected a good strategy. The overall investment strategy may also be influenced by the trust’s beneficiaries.
For example, if the goal is to provide support on an ongoing basis to a specific individual, the investment strategy may be more conservative to meet the beneficiary’s needs by emphasizing liquidity and minimizing overall risks. However, if a trust has a duration of numerous generations and distributions are not expected until many years have gone by, this might direct an investment strategy that focuses on long-term growth instead.
What to Know About Distributing Assets
One of the most important decisions you’ll make in selecting your trustee is in thinking about their ability to communicate with beneficiaries and accurately distribute those assets inside in accordance with your instructions.
However, discretionary distributions call on trustees to make delicate and difficult choices. In some cases, a trustee must weigh into their decision a history of the account value, the mission of the trust, the terms of the trust, the assets and income inside the trust, and any beneficiary prior requests.
This is because each distribution will impact the trust’s asset allocations, taxes, and overall value, among other things. The personal side of making distributions can be even more challenging, especially if a trustee is also related to the beneficiaries.
When Does it Make Sense to Select a Corporate Trustee?
Because serving as a trustee is a serious responsibility, you may decide that it is better suited to a corporate trustee. This is someone who has significant resources and expertise, including clear understanding of investment management strategies and fiduciary requirements.
Corporate trustees can also be beneficial when you need an objective and unbiased approach to the process. They also have a fiduciary duty to carry out the terms of your trust in an objective manner.
It can be more challenging for family members to be objective when it comes to difficult decisions associated with administering a trust, but an outside party as a corporate trustee is detached from any personal dynamics or conflicts.
If you have substantial assets inside the trust or other complex factors influencing your planning, working with a corporate trustee may be more beneficial.
You want someone who is comfortable serving in this role and clearly understands at the outset what will be expected of them for the duration.
Need more help determining how to fit trusts into your estate plan, or want to talk through trust terms and trustee selection? Contact our California lawyers today.
