Clients face several choices when crafting their estate plans. One of the first decisions they must make are who to designate as trustee and whether that trustee is an individual or a professional institution.
Individual (or Non-Professional) Trustees
Appointing an individual trustee has its advantages. First, naming one has only one requirement: an individual trustee must have the legal capacity to own and handle property. A non-professional trustee, such as a close friend, family member or business associate also often have hard-to-come-by knowledge of family dynamics and history. Finally, they are often less expensive than a professional trustee and may even waive their fees.
However, some of these advantages can often also raise issues. The fact that the trustee has personal knowledge of the beneficiaries may make it more difficult for the trustee to remain neutral and can cause the beneficiaries to claim the trustee is showing favoritism to one beneficiary over another.
The perception that an individual trustee is less expensive is often illusory. If the individual trustee has little experience in being a trustee, and/or makes mistakes, it may wind up being more expensive than hiring a corporate trustee at the beginning of the trust administration.
Further, considering the intended duration of the trust is important when selecting an individual trustee. If the trust is intended to be administered over the course of years or generations, individual trustees are subject to illness and death, which creates significant delays of the overall trust administration. If the Settlor of the trust is certain that selecting a non-professional trustee is the right choice, then encourage the Settlor to name at least two successors who can act if the original trustee cannot.
Corporate (or Professional) Trustees
A professional trustee can take many forms – a lawyer, an accountant, a financial planner, or a corporate trustee, such as a law firm, bank or financial services company. Selecting an individual professional trustee can offer the advantages of an individual trustee while also providing a level of experience that a non-professional often does not have. Of course, an individual professional trustee is subject to the same possibilities of illness and death as an individual non-professional trustee, so a successor trustee should always be named.
A corporate trustee has distinct advantages that an individual trustee lacks. For instance, if an individual trust officer of a corporate institution goes on vacation, falls ill or passes away, another employee can easily be assigned to the matter.
An employee of a corporate trustee will also have no pre-existing relationship with the beneficiaries, thus reducing the risk of litigation related to alleged favoritism. Trust litigation can quickly deplete trust assets, so sizable trusts should carefully consider hiring a professional trustee, individual or corporate, who is less likely to make mistakes that leave the trust vulnerable to contestation. Corporate trustees also have greater resources available to employ trained professionals to offer legal counsel, investment advice and accounting services.
However, corporate trustees are less personal and tend to be more conservative in their investments and move at a slower pace than an individual trustee. They also can be expensive, typically charging a flat percentage of a trust’s assets.
Clients are often quick to dismiss the idea of enlisting the help of a corporate or professional trustee. However, attorneys should ask their clients to consider family dynamics, the possibility for contention or litigation, and the intended duration of the trust before defaulting to an individual, non-professional trustee.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
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