Who Should Be Named as a Trustee?

It’s a very important question, and one not to be taken lightly, who should you name as a trustee?

For many people, the answer that comes to mind is to name their adult children. That is not a good idea for a few reasons. First, the trustee should not be a beneficiary of the trust as it causes a conflict of interest, which is against the trustee’s duties given to them by the legislature, however it is not illegal to do so. The IRS has issues with beneficiaries who have discretion in the trust, and for that reason alone, I do not recommend naming a child as a trustee. Second, someone who understands the law and taxes should be a trustee given the many requirements and intricacies of administering a trust, including filing taxes on the estate’s behalf and following the many duties required of them by law. The question remains, who should you name as your trustee? 

Most attorneys recommend that you hire a professional trustee rather than choosing a non-interested friend or acquaintance who is either a lawyer or CPA, as not all professional people are professional trustees. A trustee has many enumerated duties given to them by the legislature.

Additionally, a trustee can be held personally liable for mistakes errors. A professional trustee has liability insurance to cover this, but your cousin will not. There are some laws that are absolute and will not be forgiven because of a mistake.

Types of Trustees

A private trustee is a person of your choice that is not a professional trustee or a corporation, such as a bank. This person is usually a friend or family member who is paid an hourly rate for their work, however will generally take much longer to complete their work as they will have to consult with various experts for guidance. Mistakes are likely to be made and can be costly.

A professional trustee is someone who is licensed by the State of California and also charges an hourly rate. They are also known as professional fiduciaries. As they are professionals, they generally do not need guidance and can perform the work smoothly unless there is a unique and strange situation. 

Finally, there are corporate trustees such as banks. They are usually paid a percentage of the trust assets. In California it is common to charge 1%-2%, which sounds low but if your trust owns a home or has other assets totaling $1,000,000.00, a corporate trustee may be entitled to $200,000.00.

Concerns About Hiring a Trustee

Hiring a professional or corporate trustee is a good option, as it removes the burden from a friend or non-inheriting family member and prevents conflict between family members. There are, however, common concerns with hiring a professional.

1.     Cost

Trustees are entitled to receive “reasonable compensation” by law, regardless of whether they are professional or not. Even if a private trustee waives their right to compensation, there are other costs such as time, personal sacrifices, and as they are not professional trustees, they will have to reach out to various professionals for guidance, which may cost money and take additional time. Unfortunately, in many instances a private trustee may initially choose to forego compensation and then after putting in many hours of work decide that they should be compensated and a Judge will have to become involved.

2.     Loss of Family Control

 Hiring a professional should not cause you more stress. It is meant to be a relief and as such, the family should rest easy knowing they are in good hands. I recommend appointing a person (usually a non-beneficiary neutral person or persons) who has the power to remove the trustee and appoint another trustee if needed. That keeps the control within your circle of family and trusted friends.

3.     An Outsider Will Not Understand Family Dynamics

While someone outside of the family can never be a replacement for the personal knowledge of someone in the family, designating someone related can create awkward situations and force people to resent each other. It may also tempt them not to strictly follow the rules, which can put them in a legally risky situation that may cause them to be financially responsible for any mistakes or misdeeds. It is for the sake of keeping your family dynamics intact that a professional might be the best option.

A professional should take the time to become acquainted with your family before their services are needed. It is also possible to choose a co-trustee family member to help in that arena, again a non-beneficiary member is recommended.

Choosing a trustee is often times more complicated of a decision than making specific bequests in your trust. Contact me to discuss your options and for a FREE 30 MINUTE CONSULTATION.