Choosing a Trustee -P1

If your will leaves assets to a trust, the executor will transfer those assets to the trustee for distribution to the beneficiaries, or for continued management. While an executor's duties can be onerous, at least they're over within at most a few years. A trustee's duties can continue for generations. And they require expertise in collecting estate assets, investing money, paying bills, filing accountings (quarterly or annual) and managing money for beneficiaries. The trustee consults with your beneficiaries about the size of the checks issued periodically, what expenses will be paid, what withdrawals against principal will be permitted. Obviously, then, it's preferable to choose someone with whom the beneficiaries feel comfortable. Since no individual lives forever, a bank or trust company should ultimately be designated as successor trustee.
What powers should you give the trustee? In general it's a good idea to give wide latitude to the trustee, because the economy changes so quickly. And because the law often limits what kinds of investments a trustee can make, you have to spell out these powers in the trust agreement.
A trust is a binding legal contract, so the trustee--whether a bank or a relative--has a legal obligation to follow your instructions and to manage the trust funds in a reasonable and prudent manner. If the trustee mismanages the funds, any beneficiary can demand an accounting of how the money in the trust has been spent. If any beneficiary doesn't think the trustee acted reasonably, he or she can sue for reimbursement of any ill-gotten proceeds or improper losses, and have the trustee removed from that position. However, the beneficiary will have to show more than, say, that stocks the trustee bought lost money. The dissatisfied beneficiary has to show that investing in those stocks was unreasonable at the time.
The biggest decision to make in designating a trustee is whether to use a family member or a professional. Most, though not all, of the following discussion applies primarily to trusts other than living trusts; those are discussed separately at the end of this chapter.
Family Members as Trustees--Pros and Cons
Many people choose family members to serve as trustees. They don't charge a fee, and they generally have a personal stake in the trust's success. If the family member is competent to handle the financial matters involved, has the time and interest to do so, and if you're not afraid of family conflicts if one relative is named trustee, using a family member can be a good move for a small to medium sized trust. If you do make a relative a trustee, be sure to consider who the successor will be in the event of death, incapacity, divorce or other family strife.
Many settlors or grantors name co-trustees. Usually the spouse will be a co-trustee, so that when one spouse dies, the other takes over, with a successor co-trustee who's a lawyer or has some specialized legal or financial knowledge. But corporate trustees, while expert, may be too expensive for moderate estates. Before selecting a trust company, it is advisable to discuss this with a trust officer of the institution.
Often, of course, the beneficiary himself is named as trustee, if the beneficiary is an adult. This is sometimes done when the main reason for the trust is to save taxes. If the trustee's powers are restricted to comply with federal estate tax law limitations, this arrangement may give the trustee/beneficiary control over the trust assets and avoid estate taxes after his death. However, it also subjects him or her to taxes on the income from the trust. Depending on the trust and the powers of the trustee, it might open the trust assets to attack from creditors. And the beneficiary probably won't have the professional familiarity with investments that a trust officer would--though, again, he or she can hire such help.