What To Look For in a Trustee
Evan Durst, JD, CTFA, Senior Trust Strategist, Baird Trust
After a lifetime of building equity and investing smartly, you want to make sure your legacy is left in the right hands – and for many families, a trust offers significant benefits around taxes, planning and family dynamics. However, when you decide to establish a trust, you’ll also need to decide who will administer that trust – and answering that question can be complicated. Here’s what you need to know when making this decision.
What Is a Trust?
To understand what a trustee is, it’s important to first understand what a trust is. A trust is a legal arrangement which involves three parties: a grantor, a trustee, and a beneficiary. The grantor transfers ownership of designated assets to the trustee to manage on behalf of the beneficiary. There are many reasons to create a trust, such as facilitating the sale of your business, safeguarding your family’s privacy or protecting assets for future generations. Should you decide to create one, you will then need to choose who will serve as your trustee.
What Does a Trustee Do?
Managing a trust typically requires carrying out certain financial, legal, tax and administrative duties. The trustee is responsible for executing these duties while adhering to the terms laid out in the trust. The trustee must also ensure all decisions are made prudently, impartially and with the beneficiaries’ best interests in mind.
While a trustee’s specific responsibilities will depend on the trust’s structure and complexity as well as the needs of the beneficiaries, they generally fall into four buckets.
- Financial. The trustee will likely manage all aspects of the trust’s investments, which can include funding for both short- and long-term objectives. This can also include buying and selling stocks and other investments as well as making asset allocation decisions.
- Legal. The trustee will need to follow all provisions of the trust, stay current on trust law and protect the assets in the trust from creditors. The trustee will likely also need to make distributions to beneficiaries, which involves interpreting the document to determine if a distribution is appropriate.
- Tax. The trustee will likely need to file taxes on behalf of the trust and issue all appropriate tax forms to its beneficiaries. The trustee will also be responsible for minimizing the trust’s tax liability and understanding how distributions might affect the beneficiaries’ tax liabilities.
- Administrative. The trustee will be responsible for all financial reporting for the beneficiaries and documenting how decisions involving trust investments and distributions are made.
Importantly, the trustee does not necessarily need to complete these tasks themselves – they can use funds from the trust to hire outside professionals, such as investment managers and attorneys, to manage these responsibilities, though the trustee will be responsible for vetting and hiring these professionals.
Who Should Serve as Your Trustee?
When choosing a trustee, many people immediately consider a family member or close friend – someone they know and trust. While trust is crucial, there are additional qualities you should look for:
- The time and willingness to do the work. A trustee’s responsibilities are not to be taken lightly: They can cover a lot of ground, such as record-keeping, answering beneficiary questions, accounting and tax law, and require a great deal of commitment. Your trustee will need to have the time and willingness to put in that effort.
- Financial acumen. Ideally your trustee will have a deep understanding of investments (particularly for trusts with interests in real estate), income and estate taxes, and trust law.
- Sound judgment. Your trustee will likely be asked to make some difficult decisions, especially if you have multiple beneficiaries with far-reaching financial needs. You’ll want a trustee who you can trust will make impartial and financially prudent decisions.
- Longevity. Trusts are often made for the benefits of children, grandchildren and generations into the future. Ideally your trustee will be able to represent your interests and make decisions regarding your estate not only now, but ten, 20 or 30 years from now.
- Transparency. A trustee will be required to provide both beneficiaries and tax authorities with all required records and documents, and to ensure all parties are on the same page. Proactive organization and communication skills and the ability to manage sensitive and confidential information appropriately are a must.
- Experience. Serving as trustee isn’t something most people have a lot of experience in – and as such, it’s easy for important details to fall through the cracks. Someone who has served in this capacity before and knows what to expect could be a better choice.
An Alternative: A Corporate Trustee
Appointing a trustee is a big decision that leaves the appointed with large responsibilities that not everyone is equipped or willing to handle. One option to consider is a corporate trustee – or pairing your personal trustee with a corporate trustee. A corporate trustee like Baird Trust can provide you with objective decision-making, uninterrupted service and professionals who are required to always keep your beneficiaries’ interests first. When it comes to navigating difficult decisions like these, remember that your Baird Financial Advisor is always at the ready to offer sound guidance.
The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
