Selecting the right trustee is one of the most important decisions in trust planning. Many families must decide whether to appoint a corporate trustee or a trusted family member, each of which carries different responsibilities, advantages, and risks.
First of all, a basic explanation of Trusts. A Trust is a legal document. A Trust Agreement has three parties: the Grantor, the Trustee, and the Beneficiaries. The Grantor is the person whose money funds the Trust. The Trustee is the person who manages the money in the Trust and who disburses the money from the Trust, in accordance with the terms of the Trust, to or for the benefit of the Beneficiaries. The Beneficiaries, as you may have guessed, are the persons or entities (for example, a charity) for whom the Trust is established to benefit; in other words, they get the money that is in the Trust.
A person can establish a Trust during their life. For example, say a grandfather wants to establish a Trust for his grandson. The grandfather wants to place $10,000 in the Trust and wants the Trust money to be used to pay for the grandson’s education or to help the grandson buy a home.
The grandfather would probably want to go to a lawyer, who could draft the Trust Agreement for the grandfather. The grandfather would be the Grantor under the Trust Agreement: it is his money that is going into the Trust. The grandfather could also be the initial Trustee of the Trust, meaning that he invests the $10,000 and decides when, or if, to make distributions of the money to the grandson for the grandson’s education or to help him buy a home. The grandson is the Beneficiary of the Trust.
In order “to place the money into the Trust,” the grandfather might open a bank or brokerage account that is “titled” in the name of the Trust, e.g., “Joe Grandfather, as Trustee, of the John Grandson Trust.” The money – the $10,000 – has now been “placed in Trust.”
Trusts can also be set up in a person’s Will. For example, maybe the grandfather wants the grandson to have the $10,000 for education or to help him buy a home, but the grandfather doesn’t see a need to set up a Trust for that purpose, unless the grandfather dies. So, the grandfather could set up the same Trust described above, except that the Trust would be in the grandfather’s Will and would not be a separate document.
Of course, if the Trust were in the grandfather’s Will, the grandfather could not be the Trustee. So the questions then becomes, who is the best person or entity to be a Trustee?
As stated, a Trustee manages the money in the Trust (i.e., makes investment decisions) and makes distributions from the property of the Trust to the Beneficiaries of the Trust. Trusts can be very simple, e.g., my grandson gets all of the income from the Trust and the principal is to be used to pay for his education. Or, Trusts can be very complicated, such as a Special Needs Trust for the benefit of a disabled child who receives government entitlement benefits.
Depending upon the complexity of the Trust, a Grantor may wish to choose a financial institution, such as a bank, to be the Trustee of the Trust. While a financial institution will charge a fee to manage and disburse money from the Trust, even an individual Trustee (a family member) is entitled to a commission for his or her work as a Trustee.
And the benefits of having a Corporate Trustee (such as a bank) may substantially outweigh the fees they charge. In many cases, the comfort associated with having chosen a Trustee who is knowledgeable in public benefits or taxes laws far exceeds the cost of the Trustee’s fees.
The best trustee choice depends on the complexity of the trust, family dynamics, and the level of oversight required to carry out your wishes.
Choosing a trustee is critical. Understanding the differences between corporate and family options ensures your trust is managed properly and your wishes are followed.
The role of trustee comes with ongoing responsibility, judgment, and accountability. Whether that role is filled by an individual or an institution can shape how smoothly things are handled and how closely the original intent is followed. Taking time to weigh those differences can help avoid complications later.