A trust can be an excellent way to minimize estate taxes and pass assets to family members.
But with it comes the choice of who can best ensure your wishes are carried out. Given the significant role a trustee plays in your wealth planning, it’s important to understand the advantages and disadvantages of picking a person or an institution.
The trustee holds actual ownership of the assets you place in the trust, managing them and making distributions to beneficiaries. Because these duties give the trustee flexibility and discretion, it’s important to find the right person or institution for the job.
After all, you must find someone who can handle this position, understands your desires, exercises good judgment, demonstrates financial and conflict-resolution skills and possesses integrity.
Whom Should I Choose as my Trustee? Individuals or Institutions
Who will better meet these requirements — an individual or an institution? Here’s a closer look at the benefits and disadvantages of each:
i. Individuals
Family members or friends may be good candidates because they often have a more intimate understanding of your values and wishes.
You may be most comfortable having your successor run the trust because he or she understands your requests, can mitigate family conflicts and probably will come to know your company best. Although this person may lack the financial management skills required in the position, your trustee can hire a professional to help.
Keep in mind that if you create a trust to reduce or eliminate estate tax, you may want to avoid picking certain family members such as your spouse.
If the Internal Revenue Service believes you and your beneficiary have too much control over the trust, it could create tax consequences.
ii. Institutions
Banks, trust companies and other financial institutions offer professional management and experience. They also are objective and less susceptible to influence from relatives. You may want to choose one if your trustee will hold significant discretion over distributions to family members.
Additionally, institutions provide longevity and continuity, so you needn’t worry about your family having to select a successor trustee to take over should your current trustee die before the end of the trust term — a key consideration if the trust will last for decades.
But what if you can’t find all your desired traits in one person?
Fortunately, there’s another option: You can name an institution and an individual to act as trust advisers.
To the trust advisers, you extend powers to exercise discretion, normally reserved for the trustee. This action can give your family the best of both worlds — professional management along with individual insight.
Should you set up your own trust company? Instead of delegating trusteeship to an institution, some families wanting to avoid the pitfalls of naming an individual — and reduce the substantial fees of maintaining large trusts — start their own state-chartered trust company for family use.
This allows you to designate family members to operate different trusts or give them significant advisory duties.
You can organize a state-chartered trust anywhere, but you may reap bigger benefits from creating one in a state with low minimum capital requirements.
The rules are intricate, and the initial costs — including the minimum capital and filing fee — of filing a state chartered trust company start in the six-figure range.
Wanted to share any tip on how to select a perfect trustee, do in the comments!
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