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When planning to leave your assets to friends or family after your death, establishing a trust can be a wise choice. A trust not only safeguards a beneficiary’s assets from creditors but also offers family members greater flexibility in managing those assets.
A trust functions as a legal arrangement where a trustee manages the assets for the benefit of the beneficiaries, the individuals entitled to those assets.
The trustee can be a family member or a professional, such as an attorney or a bank representative. Their primary duty is to administer the trust in the best interests of the beneficiaries while complying with relevant state laws, which might differ from the trustee’s home state.
Important Factors to Consider When Choosing a Trustee
Selecting a trustee is a critical choice in the estate planning process. It’s advisable to work closely with your estate planning attorney when making this decision. Here are six essential considerations to guide you in selecting an appropriate trustee.
1. Avoid Conflicts of Interest
A vital role of the trustee is to administer the trust free from conflicts of interest. Trustees should not exploit trust assets for personal benefit or allow their interests to conflict with those of the beneficiaries.
For example, appointing a key executive from a family-owned business as a trustee could raise issues if their responsibilities to the business overshadow the interests of the trust’s beneficiaries. Similarly, naming one child as the trustee for a trust that benefits all siblings may result in biases that could disadvantage the other beneficiaries if financial distributions are made.
Therefore, it is crucial to evaluate potential conflicts meticulously to ensure the trust remains unbiased. Selecting a trustee who will prioritize the welfare of all beneficiaries is paramount.
2. Choose an Impartial Individual
In contemporary blended family situations, trustees often face intricate family dynamics. For example, a trust might require payouts to a second spouse while also benefitting children from a previous marriage. This can lead to potential tensions, as each party may have differing priorities regarding trust distributions.
Trustees are often tasked with balancing these competing interests, especially when a surviving spouse seeks to maximize income while the children prefer to focus on growing the principal amount.
Thus, it is vital for trustees to navigate these dynamics carefully to ensure that all beneficiaries feel equitably treated.
3. Types of Trustees to Consider
When selecting a trustee, you have various options, including individuals, co-trustees, or corporate trustees. Engaging various individuals in this role can be advantageous, as they can share the responsibilities associated with managing the trust.
It’s important to discuss these roles with potential trustees to ensure they are willing to undertake the responsibilities involved. A combination of corporate and individual trustees is increasingly common, where a corporate trustee handles administrative tasks while individuals focus on investment strategies and distributions to beneficiaries.
This arrangement allows for day-to-day administration to be managed professionally while still retaining personal oversight over the trust’s assets.
4. Understand Trustee Liability
Trustees carry significant responsibilities, and failure to uphold high fiduciary standards can result in personal liability. They must always prioritize the beneficiaries’ interests and adhere to reliable decision-making processes to avoid breaches of fiduciary duty.
If a trustee mismanages the trust, courts can impose surcharges against them, which may be unmanageable for individuals with insufficient funds or insurance coverage.
It’s wise to consider the financial stability of a potential trustee to ensure they can meet obligations if liabilities arise, protecting the trust’s integrity from poor decisions.
5. Prepare for Successor Trustees
Designating a primary trustee is essential, but it’s equally important to identify successor trustees. Circumstances can change, leading to a scenario where the primary trustee can no longer fulfill their duties due to various reasons like illness or relocation.
Failing to name successors may result in a lengthy court process to appoint a replacement, which can be costly and time-consuming. It is often recommended to have a list of successors to ensure seamless management of the trust over time.
6. Ensure Coordination with Guardians
If your trust involves minor children or incapacitated adults, consider how the selected trustee will work with their guardians regarding financial matters. Guardians may have specific desires about how trust funds should be spent, whether on education or healthcare.
However, these desires may not always align with the trustee’s views, leading to potential disputes. Therefore, clearly outlining expectations for both guardians and trustees can help minimize conflicts and ensure wishes are respected.
Selecting the right trustee is a significant aspect of estate planning, and careful thought should be given to the factors discussed while seeking guidance from an estate planning attorney.
Source
www.kiplinger.com