While people create trusts during their life, estate plans often include the creation of trusts at death. Knowing who you will put in charge of the trust is vital, including backup options.
You have to specifically name them in the documents. They will be responsible for carrying out the terms of the trust, making distributions, maintaining records, managing the assets, filing tax returns, and communicating with beneficiaries.
Do you name a family member or do you name a professional trustee?
It can be a difficult choice in certain circumstances. Let’s discuss what a professional trustee is, the pros and cons of a professional trustee, and a few examples of when a professional trustee may be helpful.
What is a Professional Trustee?
A professional trustee is a person or company that administers the terms of a trust for a fee.
They have expertise in following the rules of trusts, are familiar with different types of assets, and can provide continuity for the life of a trust.
Instead of a family member needing to manage the investments, file tax returns for the trust, and decide when and how to make distributions to beneficiaries, a professional trustee can fill that role.
Types of Professional Trustee Setups
Large Banks and Trust Companies with Investment Services
Many large banks and trust companies have trust divisions where they can serve as professional trustees and manage the assets.
This is convenient for many families because they have one point person who can manage the assets, make distributions, and communicate with beneficiaries. With everything integrated, you don’t need to worry about hiring a financial planner to manage the investments or communicate with multiple companies.
The downside to this arrangement is that many large banks and trust companies use their own proprietary products, which can often be expensive. Sometimes, there is an incentive to recommend one product over another based on the compensation to the firm. They may also have a limited menu of investment options that are approved on the platform.
There are also companies, usually smaller trust companies, set up to work as a directed trustee, which allows you, another individual, or financial planner to manage the investments, but the trust company will usually handle distributions, file tax returns, and handle the other administrative items.
The downside to this arrangement is that you may need to coordinate with multiple professionals; however, the upside is that if you want to manage the assets or have an existing relationship with a financial planner, you can continue it without turning over control to a large entity.
Many people prefer working with smaller companies where they can receive more individualized attention and may have less turnover than a large bank.
Pros of a Professional Trustee
There are many pros to hiring a professional trustee instead of a family member.
Independent and Objective
Since a professional trustee is not your family member, they are normally independent and objective. They don’t know your family dynamics, issues between family members, or have a bias to any individual in your family.
They have a formal set of protocols they follow based on the trust company and what is written in the trust document. There is no emotional baggage.
If there is a conflict, a set of rules will dictate what will happen – not the whims of a family member.
Distributions from the trust will be dependent on the terms of the trust and won’t be held over someone’s head as a bargaining chip like it could be in a family relationship.
Knowledge and Resources
A professional trustee normally has an extensive, knowledgeable team behind them. They do this for a living and know how to follow the terms of the trust, make distributions on time, and can answer questions beneficiaries may have regarding the rules of the trust.
A family member who has never been a trustee may not be able to answer beneficiary questions, follow the terms of the trust as they are legally required, or may miss distributions. It’s extra time, knowledge, and resources they may not have.
Although it may seem straightforward, take this example from Kiplinger about how it can become complicated very quickly when multiple beneficiaries are involved.
Since a professional trustee does this every day for families like yours, they know exactly what they are doing. The systems are in place. They have checks and balances to make sure everything gets done that needs to get done on a quarterly or annual basis, depending on the terms of the trust.
Since the professional trustee normally handles distributions, manages the investments, files trust tax returns, handles issues with beneficiaries, and keeps the proper records, family members save time by not needing to do it.
Like many areas in life, outsourcing trust management can give you back your time to spend with family, explore the world, or relax.
Liability for Errors
Since the professional trustee is responsible for the terms of the trust, they may also be liable for errors.
If terms of the trust need to be interpreted and a beneficiary is not happy with how it is interpreted and sues the trustee, the professional trustee may need to defend themselves from the lawsuit. If a family member were the trustee, they may need to hire an attorney and defend themselves.
With a professional trustee, you get to shift the liability for errors from a family member to the trust company and professional trustee.
Cons of a Professional Trustee
Although hiring a professional trustee has its pros, it is not without disadvantages.
One of the biggest cons to hiring a professional trustee is the cost. Many professional trustees charge between 0.40% and 2% of the trust value annually. Plus, many professional trustees only work with trusts that are $500,000 – $1,000,000 or larger, making it extremely challenging or cost prohibitive to appoint a professional trustee if you have a trust with less than $500,000 in it.
If you have a trust worth $1,000,000, and they charge 1% of the trust assets, that is approximately $10,000 per year that goes to administrative costs and is not available to a beneficiary.
You’ll need to decide whether the value in having the trust administered by a professional trustee is worth the cost.
While family members can charge to be a trustee, many do it at no cost.
No Personal Connections
A professional trustee is not going to have a personal connection to your family. Although this can be helpful at times when you want someone to be objective, there are times when being aware of family knowledge and empathy from a family member can be helpful.
There are certain family members with behavioral traits that may be helpful for a professional trustee to understand, but they may not ever have a full grasp on it like a family member would.
This is a double edged sword because impartial decision making is important, but there are times that a more intimate knowledge of family members is more impactful.
If there is an issue, sometimes it is easier to hear from a family member who may be more empathetic than a trained professional.
Loss of Control
If you hire a professional trustee, you are giving them the keys to your financial life. They may manage the assets, make distributions, and file tax returns.
Some people are not comfortable turning over that much control.
Like hiring any professional, it’s important to do your research and due diligence to make sure you are comfortable with the person and/or team you are hiring.
You want someone who will honor the terms of the trust, respect your family members, and give you the option to end the engagement at any time.
Examples of When Professional Trustees are Helpful
Now that you know the pros and cons of hiring a professional trustee, let’s talk about common examples where a professional trustee may be a better option than choosing a family member to administer a trust.
Elderly/Widowed and No Family/Trusted Individuals
If you are getting older and/or recently widowed with few family or friends you would trust or want to stick with the responsibility of managing your trust, you could consider a professional trustee.
As people age, their memory starts to get worse and they are often more susceptible to fraud and exploitation. Having a professional trustee may help prevent someone gaining access to your assets, help you remember to take Required Minimum Distributions, and make managing your money easier.
Bad at Managing Money
If you have a family member who is bad at managing money, it may not be a good idea to leave them a large lump sum they can use frivolously. An irrevocable trust with a professional trustee can help control distributions for their health, maintenance, and support.
The benefit of a professional trustee is that there doesn’t need to be another family member involved to approve distributions. If a family member has a bad idea about how they want to use the money, it can be the professional trustee who says no instead of a family member.
Substance Use Problems
If you have a family member who has substance use problems, a professional trustee can help make distributions in line with the terms of the trust. The trust can pay their rent, medical bills, and other ongoing expenses to reduce the likelihood that money is used for drugs.
In these scenarios, it can be tough for a family member to be the person between someone with substance use issues and money. A professional trustee can be the objective person without any emotional attachment.
Worried About Family Relationships
If you are worried about family relationships among beneficiaries, a professional trustee can help prevent family entanglements. When a beneficiary is also listed as a trustee, it introduces a conflict of interest.
Are they making investment or distribution decisions based on what is best for all beneficiaries or just themselves? Even if they are doing everything correctly, will one beneficiary perceive the actions negatively?
Whenever a family member acts as the authority or gatekeeper to a trust, it introduces the potential for family conflicts. Hiring a professional trustee can potentially reduce those family conflicts.
If you have minor children that you are responsible for and something happens to you, a professional trustee may be able to look after the money and provide distributions for education, rent, and other necessary expenses.
Although a family member can serve as trustee, they may not have the time, expertise, or desire to serve as a trustee for a minor child. If they need to also take care of the child, they may want to outsource the responsibility of the trust management.
Special Needs Child
If you have a special needs child, there may be special trust planning that is required. The trust may need to operate their entire life, and the continuity a professional trustee can bring may be helpful.
Although a family member can serve, if it’s an older family member, there may come a time when another family member needs to take over. It can be difficult to bring a new person up to speed and if you can’t find someone, it becomes more challenging to decide what to do.
Perhaps you have a primary trustee who is a family member with a few backup options. You could still name a professional trustee as a backup option.
If everybody is unwilling or unable to serve, then you still have expressed who you want to take over administering the trust. I find this helpful for many people because it can be the person of last resort.
If everybody is unwilling to serve and you don’t have a professional trustee listed as a successor trustee, the beneficiaries may decide or it may go to a court to decide who to take over. Personally, I’d much rather select my successor trustee in advance rather than leave it up to another party.
Final Thoughts – My Question for You
Professional trustees are not discussed often enough. In a world where many people don’t review their estate plans for years or decades, much can change.
A trustee you named a decade ago may not want to serve anymore or may not be in a convenient geographic location to serve.
Although professional trustees can be expensive, they can be independent and help everyone save time. The downside is that you have to be willing to turn over control.
I’ll leave you with one question to act on.
Does a professional trustee have a role in your estate plan?