Deciding Whether to Select an Individual or Corporate Entity as Trustee of a Trust
Trusts exist for a variety of purposes and take many forms. One example is a trust that an individual or couple creates to manage their assets. During their lives, they are the beneficiaries. This same trust can also dispose of assets at their deaths, similar to a will. Another example is a trust that’s included in a person’s will, where the beneficiaries are identified in the will. These trusts are established upon the death of the person who made the will.
Regardless of the type, the person creating the trust, the grantor, names a trustee and successor trustees. The trustee is the person or entity responsible for carrying out the trust terms. Choosing a trustee is one of the most important aspects of trust planning, no matter the type of trust.
The grantor can name an individual, like a family member or trusted friend, or a corporate trustee. Many people default to naming an individual trustee without fully realizing the obligations and risks the person will encounter, not to mention the time commitment involved.
A trustee’s duties can sometimes be traps for the unwary and can land an individual trustee in court to defend their actions or inactions. Therefore, it is important the grantor consider the pros and cons of naming an individual versus a corporate trustee. To do this, understanding a trustee’s responsibilities under the law as well as those included in the trust document is imperative.
A trustee holds, maintains, and manages trust assets for the benefit of the beneficiaries. A trustee is a fiduciary, meaning that in addition to being responsible for managing assets, trustees owe certain high-level duties to the trust beneficiaries.
Trustees have a duty to administer the trust with the same level of care and skill that a capable person would use to manage their own affairs. This includes following the “prudent investor rule,” investing and managing trust assets as a “prudent” investor would.
Trustees have a duty of loyalty to the beneficiaries, putting the beneficiaries’ interests ahead of their own. An individual trustee may have trouble carrying out this duty when he or she is also one of the beneficiaries.
Trustees must also be impartial, taking the interests of all beneficiaries into account when making investment and management decisions. Individual trustees may be fearful of making bad investment decisions and decide to hire an investment manager. Corporate trustees make investment decisions internally, and are ordinarily better able to assess risk, monitor interest and inflation rates, economic reports, and the like. They also must comply with banking laws and regulations.
Trustees must keep complete, accurate books and records of the trust assets and transactions. They must also inform the beneficiaries about anything that might affect their rights as beneficiaries. Additionally, if a beneficiary asks the trustee to provide an accounting of trust assets, income, and disbursements, the trustee must comply.
Many assume a corporate trustee will cost more. While corporate fiduciaries do charge fees, they also have years of experience administering trusts of all types. Individuals generally lack this experience and therefore may need to hire several professionals, such as attorneys, accountants, and investment advisors, to help carry out their responsibilities, while a corporate trustee can be a “one-stop shop.”
Finally, many corporate trustees have experience administering special needs trusts for beneficiaries who are disabled and receive public benefits. The Arc of Texas manages special needs trusts and is an economical option for such beneficiaries.
The grantor’s estate, intent, and circumstances will influence the decision. Understanding what is required of a trustee is crucial when deciding whether to name an individual or corporate trustee.
You may visit our website at www.wrightabshire.com. Nothing contained in this publication should be considered as the rendering of legal advice to any person’s specific case but should be considered general information.