Like many people, you may decide to incorporate a trust into your comprehensive estate plan. If so, one of the most important steps in creating your trust will be to select a Trustee to administer the trust. In fact, you may not realize just how important choosing the right Trustee is to the success of your trust. To help ensure that you make the right choice, we will explain why your choice of Trustee matters more than you realize.
What Is a Trust?
A trust is a separate legal entity that owns and holds property for the benefit of one or more beneficiaries. A trust is created by a Settlor, also referred to as a Grantor, Trustor, or Maker, who transfers property to a Trustee appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries. All trusts fit into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust, as the name implies, does activate during the Settlor’s lifetime.
What Role Does a Trustee Play?
Once a trust is established and active, someone must administer the trust. That is the role of the Trustee. Think of a Trustee as the captain of the ship. The Trustee must rely on the trust terms, creating by the Settlor, for guidance during the administration of the trust. In fact, those terms must be followed exactly as written unless a term is illegal, unconscionable, or impossible. Not only is a Trustee responsible for distributing trust assets to the beneficiaries according to the terms in the trust, but the Trustee but also manage and invest those assets in the meantime. Because the Trustee is managing assets that are meant to benefit someone else, the Trustee is in a fiduciary role. This means that the Trustee must be more careful with the trust assets than with his/her own assets.
What Could Go Wrong? A Lot!
Appointing the wrong Trustee is among the most common mistakes made by people when they create a trust. Although it’s understandable that people appoint a spouse or family member as their Trustee based solely on the fact that they know the person will have their best interests at heart, doing so often leads to the trust failing or performing poorly. Successfully administering a trust requires a clear understanding of the trust terms as well as at least a rudimentary knowledge of the applicable laws that govern trust administration. No matter how good a Trustee’s intentions may be, if he/she lacks the experience and skills necessary to administer the trust, a wide range of things can go wrong. The trust assets could even be totally depleted if the Trustee mismanages the assets and/or makes poor investments. Although not as serious, the wrong Trustee could also result in conflicts among the beneficiaries or failed disbursement of assets, just to name a few potential negative outcomes. In short, choosing the wrong Trustee dramatically increases the likelihood that the ship will sink.
How Do I Choose the Right Trustee?
Understanding the importance of choosing the right Trustee is crucial. Next, you need to know how to go about choosing the right person for the job. Appointing a professional Trustee is always an option, and one that is almost sure to guarantee the success of your trust. If you prefer not to appoint a professional Trustee, however, at least take the time to discuss potential candidates for the position with your trust administration attorney.
Please download our FREE estate planning checklist. If you have additional questions or concerns about choosing the right Trustee for your trust, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.