How to Draft a Will – 10 Steps to Choosing a Trustee
KEY POINTS
Understanding Trusts
A trust is a legal arrangement where assets are transferred by a grantor / settlor to a trust for the benefit of one or multiple beneficiaries.
Critical Role of Trustees
Trustees, whether individuals, corporations, or specialists, play a pivotal role in safeguarding family wealth and legacies including asset protection, estate planning, and investment management. Their expertise, continuity, and impartiality are essential for achieving the goals set out in the trust.
Choosing the Right Trustee
The trustee selection process involves careful consideration of legal requirements, early discussions with partners and advisors, and a comprehensive evaluation of potential candidates to ensure alignment with your objectives.
Before we delve into the process of selecting a trustee, let's pause to address the following question.
What is a Trust?
A trust can be an invaluable estate planning tool.
It is a legal arrangement in which one party, known as the grantor or settlor, transfers assets or property to a trust to be administered and managed by a trustee. The trustee holds and manages these assets for the benefit of one or more beneficiaries specified by the grantor. Trusts are created to achieve various financial, estate planning, and asset protection goals.
Trustee’s Role
A trustee serves as a fiduciary, obligated by law to manage the trust in a manner that prioritizes the welfare of the beneficiaries and adheres to the provisions outlined in the trust document.
The administration may involve asset protection, investment management and distributing income or assets to the beneficiaries.
Their role can extend across multiple generations and have a profound impact on your legacy.
Trustee’s Value
Their expertise in financial management, legal compliance, and adherence to the grantor's wishes contribute to the long-term financial security of beneficiaries, making them instrumental in preserving and passing on family wealth and legacies.
Furthermore, trustees provide continuity, as they can oversee trusts for generations, ensuring that the grantor's vision endures.
Trustees also serve as impartial mediators, resolving any potential conflicts among beneficiaries while making decisions that uphold the highest ethical standards.
Types of Trustees
There are several different types of trustees available to achieve your estate planning goals. Your choice of trustee will be influenced by, but not limited to,
Trust’s purpose and goals
Trust size and complexity
Nature of assets
Trust duration
Legal and regulatory
The following trustees can be utilized to fulfill distinct estate planning goals.
Individual Trustee
Individuals are often appointed in a will or trust document to act as trustee for various purposes. It is common to appoint a family member or close friend. However, complex estates may require specialized expertise and necessitate the appointment of a professional or corporate trustee.
Corporate Trustee
Banks, trust companies, and financial institutions can serve as trustees. Their expertise and independence are well suited for substantial wealth, advanced investment strategies, or complex estates. They also offer the potential for continuity over an extended period.
Investment Trustee
You may consider appointing this type of trustee if you require expertise in financial markets, asset management, and developing investment strategies aimed at achieving short-term and long-term goals.
Administrative Trustee
A complex trust or one with numerous beneficiaries may benefit from the appointment of an administrative trustee. They are responsible for managing the administration of the trust including legal compliance, maintaining records, and general paperwork.
An administrative trustee may work with other trustees (e.g., individual, corporate, investment) that are duly appointed to provide fiduciary services to the trust and its beneficiaries.
Successor Trustee
A successor trustee is appointed when the current trustee can no longer perform the duties required due to circumstances that may include incapacity, resignation, or death.
The successor trustee would commence acting as a fiduciary and administering the trust’s assets in accordance with the trust document. Such often includes collaboration with other trustees or advisors.
Charitable Trustee
A charitable trustee is appointed when the trust’s primary objective is to support charitable causes. Their role involves managing and distributing trust assets to eligible charitable beneficiaries, while maximizing charitable impact.
Bankruptcy Trustee
This type of trustee oversees the bankruptcy process for an individual or business. They must manage the assets, evaluate claims, and ensure a fair distribution of assets in accordance with bankruptcy laws and regulations of the respective jurisdiction.
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Executor |
Trustee |
|
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Role |
Appointed in the will to administer a person’s estate after death |
Typically appointed in the trust document to manage and administer assets held in a trust on behalf its beneficiaries |
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Activation |
Effective upon the testator’s death |
The trust and the trustee’s authority can commence during the individual’s lifetime or upon their passing depending on the type of trust |
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Responsibilities |
Distributing assets, settling debts, paying taxes, and carry out the provisions of the will |
Investing, asset protection, and distributing the trust’s assets as per the terms and conditions of the trust |
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Scope |
Commences upon death of the testator and confined to the instructions outlined in the will |
Scope can vary widely depending on the trust document |
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Duration |
Ceases once the estate has been fully administered and distributed as per the will |
The trust document will specify the duration which could extend beyond the settlor’s lifetime and covering future generations |
Trustee vs. Power of Attorney
A trustee is not the same as a power of attorney.
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Power of Attorney |
Trustee |
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Role |
Appointed in a legal document to make financial, legal, and sometimes medical decisions during the individual’s lifetime |
Typically appointed in the trust document to manage and administer assets held in a trust on behalf its beneficiaries |
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Activation |
Effective when the individual becomes incapacitated or unable to make decisions for themselves |
The trust and the trustee’s authority can commence during the individual’s lifetime or upon their passing depending on the type of trust |
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Responsibilities |
May include managing financial affairs, signing legal documents, paying bills, and making healthcare decisions |
Investing, asset protection, and distributing the trust’s assets as per the terms and conditions of the trust |
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Scope |
Scope can vary from very broad to very narrow |
Scope can vary widely depending on the trust document |
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Duration |
Remains in effect if the individual is alive and is incapacitated or unable to make decisions for themselves |
The trust document will specify the duration which could extend beyond the settlor’s lifetime and covering future generations |
Does a Trustee Need to Be a Person?
A trustee may include an individual, lawyer, board of directors of a corporation or charitable organization, corporate officer, government entity, and more. It is important to ensure such designations comply with laws governing the respective jurisdiction.
Now that we have clarified the nature of a trustee, let’s go through the process of choosing a trustee.
10 Steps to Choosing a Trustee
Choosing a trustee is a significant and complex decision. Several key factors should be considered to ensure that your wishes are executed as desired.
Here are 10 important steps to take when selecting a trustee:
1. Identify the Need for a Trustee
Ensure you have a clear understanding of the reasons behind the decision to appoint a trustee. Trusts can serve many purposes including asset protection, asset management, transfer of wealth, and charitable giving. The trust’s purpose will have a material impact on your choice of trustee.
2. Define Trust Objectives
Determine the trust's intended timeframe, goals, and how these objectives should contribute to the beneficiaries' well-being. This will establish a clear plan that might encompass asset protection, investment management, and distributing income or assets to the beneficiaries.
The distinctive expertise necessary will help you narrow down your selection of potential candidates for the role of trustee.
3. Research Legal Requirements
Laws and regulations governing trusts will vary by jurisdiction. The legal requirements may require the trustee to be of a minimum age, be free of conflicts of interest, or possess certain professional qualifications.
4. Partner Consultation
Start Early
It is wise to initiate open and early conversations with your partner about your choice of trustee. It ensures alignment of preferences and responsibilities, preventing disagreements and conflicts. Start these discussions early to allow ample time for thorough decision-making.
Time Commitment
Be ready to invest a significant amount of time, as reaching a consensus may require compromise and an extended timeline.
Family Consultation
At an appropriate point, consideration should be given to involving other family members in the process. Immediate family members like children or siblings, may be able to provide valuable insights into the strengths and weaknesses of your potential candidates.
Trusted Advisors
Similarly, trusted friends, mentors, or advisors may also be able to provide objective opinions and insights on the potential candidate’s suitability.
5. Identify / Choose Candidates
Create a list of potential candidates. It may consist of family members, friends, or trusted professionals.
A professional trustee may provide expertise, long-term continuity, and impartiality. Whereas family or close friends may have a deeper understanding of your values, wishes, and those of your beneficiaries.
It's prudent to include several names since situations can change, and your top choice may not be available when required (refer to Successor Trustee above).
Evaluate each candidate’s suitability in accordance with the trust’s objectives. This should include a thorough assessment of their financial acumen, experience, and ability to fulfill the fiduciary duty.
Maintain a written record summarizing the pros and cons of each candidate as they relate to your priorities.
6. Co-Trustees / Advisory Team
Your chosen candidate may benefit from collaborating with co-trustees or specialized independent consultants whose skills align with the trust's objectives, especially for decisions involving investments, taxation, and legal matters.
If you do not appoint co-trustees, consider providing your candidate with a list of recommended advisors to assist in these areas. Ensure your candidate is comfortable working within a team when necessary that aligns with your estate preferences.
7. Conflicts of Interest
Assess potential conflicts of interest when selecting a trustee.
Consider the candidate's personal and financial ties to beneficiaries and their own financial interests. Avoid appointing someone with real or perceived conflicts that might compromise impartiality in estate and financial decisions.
For example, avoid designating a business partner if the beneficiaries are family members. Such could also disqualify them from becoming part of the advisory team.
8. Candidate Meeting
Consider discussing the following when meeting with candidates:
Role
Initiate an open dialogue with your candidate and assess their willingness to assume the role. Additionally, discuss their availability to fulfill the role, as it can be a time-consuming endeavor.
Factors like their geographical location (e.g., city, state/province, country), work commitments, or personal responsibilities may affect their ability to dedicate sufficient time to meet your objectives.
Compensation
Engage in an honest and transparent discussion with the candidate regarding compensation for the services they will be expected to perform. Consider the scope of responsibilities, complexity of the estate, and the estimated time commitment required.
Compensation is often calculated based on a fee rate, percentage of assets under management, or a combination thereof. If you have not provided specific instructions regarding compensation, it may be left for the court to decide.
In some cases, family members or close friends may be willing to forgo compensation altogether.
9. Documentation
Document your decision-making process and any agreements made as such may be required in future legal proceedings.
10. Review and Reassess
Circumstances change. Periodically review your decision to ensure it remains appropriate. Be willing to make changes, if necessary, to protect your estate and beneficiaries.
Some types of trusts, depending on the language in the trust document and jurisdiction involved, may permit changes to the trust and trustee. Such changes may require approval by the beneficiaries.
FINAL THOUGHTS
Trustees, whether individuals, corporations, or specialists, play a pivotal role in managing assets and preserving legacies. Their expertise and impartiality are vital for achieving various trust objectives, be it asset protection, wealth transfer, or charitable goals.
The process of choosing a trustee involves careful consideration of legal requirements, early conversations with partners and advisors, evaluation of potential candidates, and a proactive approach to conflicts of interest.
Your trustee selection can significantly impact your financial legacy, so periodic reviews and adjustments are essential as circumstances evolve.
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