Sicne trusts are the preferred estate planning tool for many of our Wake County area clients, we are frequently asked whether it’s smart to name an individual as trustee, such as a family member or close friend, or if it would be more prudent to name a professional trustee such as a bank or corporate trust department.
Fiduciary Duties of a Trustee
The amount of responsibility that a trustee has should not be taken lightly. A Trustee has a variety of responsibilities such as:
- Prudently investing and managing the trust’s assets;
- Properly paying and filing any applicable local, North Carolina, and Federal taxes;
- Correctly interpreting and following the terms of the trust;
- Properly distributing assets to or for the benefit of the beneficiaries of the trust in accordance with trust law and the terms of the trust document.
These are fiduciary responsibilities—meaning that if a trustee makes a mistake, it’s up to them to fix that mistake—out of their own pocket, which makes the selection of a trustee critical to the success of your estate plan.
Advantages and Disadvantages of Selecting an Individual to Serve as Trustee
For clarity, when we say “selecting an individual” we’re referring to naming one or more family members or friends as Trustee or Co-Trustees. Here are some of the potential advantages and disadvantages:
Individual Trustee: Advantages |
Individual Trustee: Disadvantages |
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Possibly less expensive |
Many assume that a family member or friend will serve without compensation, but this may not be true. Plus, they may need to spend trust funds to hire a professional to help them, such as legal advice to interpret the document and provide guidance, an accountant to help with proper tax filings, and a financial advisor for investment management. |
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More intimate knowledge of you, any wishes you may have shared with them, and the needs of your beneficiaries |
May lack the required knowledge of trusts, trust record-keeping rules, and trust laws |
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Care for your beneficiary’s well-being |
Inexperienced in making investment and distribution decisions |
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No vetting process is needed before selecting the Trustee. |
Can be subject to the influence of others such as their spouse, the beneficiary, or other family members which could result in family disputes |
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Can cause family tension due to the change in family dynamic where one family member is now responsible for distributing money to another family member |
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In certain instances, being a related-party trustee may be inappropriate for tax-planning purposes due to IRS restrictions |
Advantages & Disadvantages of Selecting a Corporate Trustee
A Corporate Trustee is generally a Bank, Trust Company, or Professional.
Corporate Trustee: Advantages |
Corporate Trustee: Disadvantages |
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Experience and expertise with trusts, trust record-keeping requirements, and trust law |
May be more expensive than an Individual Trustee |
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Experience and expertise in investment management |
Not available nights and weekends |
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Employs trained professionals and carries appropriate liability insurance |
Less intimate knowledge of you and your wishes (though you may be able to overcome this with a letter to the Trustee) |
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Unbiased |
Less intimate knowledge of your beneficiary (though you may be able to overcome this with a letter to the Trustee) |
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Potentially more time and energy required on your part to vet and select a Corporate Trustee |
