Choosing a Trustee -P2

Here's the downside to choosing family members.
  • Lack of expertise. Relatives often lack the financial acumen of a professional trust officer, and so must often hire professional help.
  • Mortality. Trusts can last for many years. Human trustees die; banks don't and if they merge, the new company automatically will succeed to its trust operations.
  • Family conflicts. Depending on their relationship with the beneficiary, family trustees may have problems with what the beneficiary wants and what's best for him or her. Sibling rivalries may also complicate arrangements in which one brother or sister serves as trustee for others. A professional manager doesn't face such pressures.
An increasingly popular middle course between naming an institutional trustee and naming a family member is choosing a relative as trustee--and hiring a bank or investment company as an independent investment advisor, rather than naming it as a co-trustee. It has deep pockets and is familiar with the nuances of law and investment financing, but its fee for investment advice may be smaller than the one it charges to serve as a co-trustee. Often, for tax reasons, you would name both your beneficiary and another family member as co-trustees, then have the non-beneficiary co-trustee hire the investment advisor.
Using a Lawyer as Trustee
If you pick a lawyer, he or she may charge by the usual hourly rate, which may prove less or more expensive than a bank's fee. Some firms have set up investment subsidiaries to handle the trustee business, but there's a possible conflict of interest there. If you choose a lawyer as trustee, ask to see his or her records of performance in investing and managing trust income.
A good rule of thumb: if the trust assets amount to more than a few hundred thousand dollars or has any complicated problems, you should at least explore the option of using a professional trustee.
Splitting the Difference: Co-Trustees
Again, there's the possibility of splitting the job among several persons, professional and non. You might pick someone who's good with investments, another who knows taxes, and a third who can talk to the beneficiaries. Usually, the attorney for the trustees can handle the tax problems without being a co-trustee.
Be aware that fiduciary tax returns can be complicated, and the IRS likes to scrutinize them.
You (the settlor) can decide how the multiple trustees will make decisions; be sure to establish some mechanism for resolving disputes. Obviously, too many cooks can spoil the broth, and you shouldn't make someone a trustee just to keep him or her from feeling left out; make sure he or she can be useful.
The co-trustee should be familiar with the nuances of this particular trust. Also, he or she should be sensitive to present or potential conflicts between family members you're considering naming co-trustees, particularly parents and children.
If you designate a family member as trustee, be sure to designate another family member as successor co-trustee to take over after the original family member co-trustee dies or becomes incapacitated.

Warning: in some tax-saving trusts, the IRS prohibits using family members (especially spouses) as co-trustees. That's why you should be sure to have a lawyer's advice in naming a trustee.