The Federal lifetime estate tax exemption is scheduled to sunset at the end of 2025. Barring any changes from Congress, the federal estate exemption is set to decrease from around $13 million to $7 million per person. This impending change means it might be a good time to revisit your estate plan. For many, an estate plan includes one or more trusts.
A trust is a fiduciary arrangement allowing a third party, or trustee, to hold legal title to assets on behalf of a beneficiary or beneficiaries. Trusts specify how and when assets pass to beneficiaries; a trustee is appointed to carry out those written directives, so competence, good judgment, and common sense are a must. Who is the right choice?
In this post, we’ll explore the factors to consider when choosing a trustee, while debunking a few common misconceptions.
Factors to Consider When Selecting a Trustee
A trustee can be a non-professional or professional individual, or an institution. Each has its advantages and disadvantages, depending on the specific nature of the trust. A trustee’s duties may require expertise in collecting estate assets, paying bills, filing tax returns, as well as managing investments. These duties can last for years, decades or generations so it is important to consider whether that potential successor is willing and able to serve when needed.
A trustee’s interpersonal skills can be an important consideration. They will interact with beneficiaries and have discretion over trust distributions, making their ability to navigate family dynamics vital.
The physical location of the trustee can be important for relationship and tax reasons. Selecting a trustee in a state without an income tax can shelter non-distributed income from taxation at the state level, even if the beneficiaries reside in an income tax state. The opposite can also be true, creating an unnecessary tax burden on the trust.
Non-Professional Individual Trustee: This may include the grantor, family members, or close friends and is most suitable for trusts with a limited number of assets or finite time horizon. Advantages include familiarity with family dynamics, the potential for no or low administration fees, and perhaps a personal stake in the trust. Potential downsides, however, include time constraints, conflicts among family members, and limited expertise.
Professional Individual Trustee: Professionals such as CPAs, attorneys, or fiduciaries can provide expertise and impartiality. They may be best-suited for larger trusts with complex assets or a finite time horizon. The advantages include knowledge of family dynamics, expertise, availability, and impartiality. Potential downsides to using a professional trustee may include higher fees, potential for trustee turnover, and less personal involvement than a friend or family member. When naming an individual trustee, it is advisable to also name a successor trustee.
Institutional Trustee: Banks or trust companies are ideal for long-term and multi-generational trusts with numerous beneficiaries. These corporate trustees are subject to regulatory oversight and offer expertise, impartiality, availability, and longevity. Institutional trustees, however, typically charge higher fees, may lack flexibility, and offer limited investment options for trusts holding marketable securities.
Co-Trustees or Trust Protectors. Hiring a professional or institution as co-trustee along with a family member may leverage the strengths of each, creating a well-rounded team. Some institutional trustees, however, will not accept appointment along with a co-trustees or may charge additional fees to do so. In those instances, naming a trust protector may be a better solution. A trust protector can serve as an advisor to the trustee, while maintaining the ability to remove and appoint trustees.
Successor Trustee. Naming a successor trustee is critical if trust assets have the potential to last beyond a trustee’s lifetime. Like trustees, successor trustees may be individuals or institutions. Naming an institutional (or “corporate”) trustee as ultimate successor (trustee of “last resort”) is frequently recommended by estate planning attorneys, even if the person(s) establishing the trust appoints individuals as both current and successor trustee.
Three Common Misconceptions
“Professional trustees are expensive.”
While professional trustees charge fees for their services, they often provide valuable expertise and impartiality. The cost is often more than justified by efficient trust administration.
“Family members will work for free.”
True and False. While some family members might administer a trust without compensation, they are eligible for it. Most trust documents include provisions for trustees, including family members, to take reasonable compensation. While potentially entitled to compensation, they may not possess the expertise needed for effective trust administration, potentially leading to the need for outsourcing or professional assistance.
“Choosing a professional trustee will upset the family.”
While this concern is valid, in some cases, selecting a professional trustee may help better distribute responsibilities evenly among multiple family members and prevent disputes.
Choosing the right trustee of a trust is a decision that requires careful consideration. It is not just about professional versus non-professional, but also about the unique needs and dynamics of your family and your trust.
By understanding these important factors and debunking a few common misconceptions, we hope you make an informed trustee decision which safeguards your legacy and assists your beneficiaries for years to come.
Remember to consult your estate planning professional to gain insight into your specific circumstances. If you’d like to reach out to your team at Vista first, we’d be delighted to help.