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November 4 2008

Selecting a Trustee

By Neil L. Kimball

This article is intended to provide some insight into the factors to consider in selecting successor trustees of your trust. It is intended as a general guide for informational purposes. It is not a substitute for specific legal advice pertaining to your particular trust.

When you form a living trust, you are usually referred to in the agreement as the "grantor" or "settlor." You probably will name yourself as the initial "trustee" to manage the assets in the trust for your benefit as the primary "beneficiary" of the trust. In the agreement, you will need to appoint one or more "successor trustees" to manage the trust after you stop acting as trustee because you elect to resign or because you are unable to act because of disability or death. The successor trustee will administer the trust for your benefit until your death and then for the benefit of the remaining beneficiaries specified in the trust agreement.

A trustee is a "fiduciary" who is responsible for managing assets for the benefit of others. This places certain legal duties on the trustee beyond those required when one manages their own assets. The trustee is obligated to administer the trust with fairness and impartiality toward the beneficiaries. A good trustee is someone who is organized, does not procrastinate, and who communicates openly with the beneficiaries. Much of the stress and conflict between trustees and beneficiaries can be avoided if the trustee simply communicates well with the beneficiaries.

Another duty of the trustee is to invest the trust assets prudently. Usually this involves understanding the needs and risk tolerance of the beneficiaries, and taking into account the time period over which the assets will need to be invested. The trustee needs to invest those assets to produce an appropriate balance of growth and income to meet the needs of the beneficiaries. Proper diversification of investments is an important factor to manage risk and yet maintain principal to the extent possible. As a fiduciary in charge of assets for others, this quite often requires the trustee to be somewhat more conservative than they might be if they were investing their own assets based on their personal risk tolerance.

Many individuals choose to appoint family members as successor trustees. This may be an appropriate choice for you. However, you should consider your particular situation. Even though you may have an adult child who otherwise satisfies the requirements of a good trustee as discussed above, that child might not be a good choice to administer a trust share for his or her younger sibling. In some cases, you may not want to put your son or daughter in a position of having to act like a parent managing finances for your younger children. Remember that any rivalries among children tend to be more subdued while the parents are alive. Often when the parent dies, those rivalries become much more pronounced, especially under the stress arising from the loss of a parent. This concern is less of an issue if your trust leaves everything outright to your children at your death (rather than holding the assets for a lengthy period of time until your younger children reach a certain age). Also, even if your children get along, don't forget to take into account the influence that may exerted by their respective spouses.

If your situation indicates that a family member might not be a good choice or that their appointment might cause undue family stress, then you should consider a professional trustee. This professional trustee could be an individual, bank or other trust company. You can appoint the professional trustee to serve alone or you could appoint them as a co-trustee with a family member. The co-trustee situation is sometimes helpful because the family member trustee is likely to know what is happening in the lives of the beneficiaries and can assist the professional trustee in making appropriate distributions from the trust. You can always allow the individual family trustee to resign if he or she feels that the position is too stressful. Also, you can include in the trust agreement a power to remove and replace the professional trustee in case they are not performing their duties well or the relationship with the beneficiaries has otherwise broken down. This power of removal can be held by the individual family-member trustee or by vote of all the beneficiaries.

The selection of appropriate successor trustees is an important part of developing your trust because, depending upon the nature and extent of your assets and the terms of your trust, the duties and responsibilities of the trustee can be significant.