By Bill Harris, RMA
Choosing a trustee to manage your assets after you pass away is one of the most important estate planning decisions you make.
It may seem easy in concept, but it’s far from simple.
Some people default to the idea that naming the eldest child as trustee makes logical sense. Others name a family member to save money. No matter what the reasoning, selecting a family member as trustee instead of retaining a professional trustee can lead to heartbreaking problems.
We want to believe our family will always get along and keep each other’s best interests at heart. The reality, however, is that family dynamics can quickly change when the grief of losing a loved one and the sentimentality of dividing up assets is involved.
While naming a family member as a trustee may seem like a wise cost-savings decision in the short term, in the longer term it can cost the estate tens of thousands of dollars – or more – to settle contested estates.
Gail and Susan’s mother named them both as co-executors of her estate. As Gail lived in another state, she relinquished her role as co-executor and Susan was designated as the sole trustee. After their mother passed away, most of her assets were divided between the two daughters without any problems.
Trouble arose, however, when Gail discovered an investment that was supposed to be given to her had not been transferred into her name. When she repeatedly contacted Susan to square things away, Susan became combative and defensive and said that because she had done most of the work as it pertains to the estate, she should receive this investment in return. Susan then declared she needed the money in that investment to pay taxes on the amount Gail had already received. The fight raged on, and the sisters ended up in a protracted and expensive legal battle. Gail and Susan’s relationship was ruined forever.
It’s safe to say that this is not what their mother had in mind when she designated her daughters as co-trustees.
Responsibilities of a Trustee
A trustee manages a trust set up by a grantor and manage the trust assets according to terms established by the grantor. A trustee has a fiduciary responsibility to manage the trust with the utmost care and in accordance with the grantor’s wishes. A trustee is legally required to work in the best interests of the trust and its beneficiaries. The accounting for the trust must be accurate and a trustee must use wise investment standards and invest money responsibly. A trustee ensures that trust funds are available for the named beneficiaries in accordance with the grantor’s terms.
One of the more difficult differentiations for a family member to make when acting as a trustee is that this is not their money, even if they are also a named beneficiary. When one child doesn’t agree with a sibling’s decision about how to manage a trust, it’s understandable that things can get ugly.
Managing a trust is a complex process. If someone does not have the proper financial and/or legal qualifications, there is a lot to lose.
Designating a Professional Trustee
To avoid potential conflicts, many people designate a professional trustee to manage their estate.
A professional trustee brings structure and experienced oversight to the trust administration. While this is a paid service, in most instances it is money well spent for peace of mind and conflict avoidance. A professional trustee can make the tougher decisions without becoming embroiled in family drama or sentimentality. It is easier for a professional trustee to take a hard stand and say ‘no’ to unwise investment decisions, for example.
Trusts are complex legal documents with significant tax and family implications. If you were in a lawsuit, you wouldn’t designate an inexperienced family member to represent you as your attorney, would you? Designating a trustee carries the same weight and responsibility. While many people want to bestow the ‘honor’ of managing their estate to a loved one once they die, it will become a burden to the loved one instead of an honor if things go sideways.
It is particularly important to have a professional trustee for large or complex estates, but even smaller estates can run into problems with family members. You work hard to build the assets you have accumulated over a lifetime and nobody wants the outcome of their life’s work to cause strife in the family.
About the author: Bill Harris, RMA®, CFP®
Bill Harris is a Retirement Management Advisor® (RMA®), a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP®), a Master Elite Ed Slott Advisor, and author of ‘Inheriting Your Spouse’s IRA’. He is President of WH Cornerstone Investments, a financial advisory firm located in Kingston, MA. Learn more at https://whcornerstone.com/.
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