Whether you are single or married, have a modest estate or millions, the decision of who to choose as your executor or trustee is the most important estate planning decision you will have to make. You can have all the right documents, but if you choose the wrong person your money and property may not be handled the way you want.
Apart from the power over your estate, being an executor or trustee is a lot of responsibility. It’s critical to know exactly what you’re entrusting that person with so you can explain to him or her in detail what it means.
We’re going to cover that along with everything else you need to know to pick the right executor or trustee, including:
- What an executor or trustee is
- Who can be a trustee
- What an executor or trustee does
- What to consider when choosing your executor or trustee
- How you can guarantee your trustee will succeed
What Is an Executor or Trustee?
If you are doing a Last Will, Trust Agreement, or a financial or medical Power of Attorney, you have to designate someone to handle your affairs if you become incapacitated and for after you pass away. That person is called the “Executor” if you have a Last Will, or “Trustee” if you are doing a Trust Agreement. If you are hospitalized or become incapacitated, you need a Power of Attorney and that person is sometimes called an “attorney-in-fact” or “agent.”
For ease of reading, we are going to refer to the person you designate to handle your financial and personal affairs throughout this article as your “Trustee.”
Before you choose your Trustee, you have a lot to consider. The person you choose will need to have the right temperament, knowledge, and experience. He or she obviously must be trustworthy since your Trustee will operate without direct supervision and will have custody of your money and property. There are many characteristics and circumstances to consider.
But first, who is even eligible?
Who Can Be a Trustee?
You may name a family member, friend, business associate, or a corporate trust bank to be your trustee.
We generally recommend naming one Trustee to serve alone, with one or more designated backups.
Naming two or more Co-Trustees to serve together is an option but can be inconvenient for them and may cause arguments or deadlock. If you are inclined to nominate two or more people to serve together, the matter should be carefully analyzed.
What to Consider When Choosing a Trustee
In order to choose the best trustee, you need to understand what sort of time commitment you’re asking for, what personal characteristics make a good Trustee, and their reputation within your family and trusted circle.
Timeline and Standards for Trustee Duties
Your Trustee handles things only when you cannot. The Trustees involvement might arise after you die but it might also involve a period of time that you are hospitalized. During that time you can set standards for the Trustee to follow.
If you have a minor health event, your Trustee might just be responsible for temporarily paying your bills. In the case of a long-term or permanent health problem, your Trustee may be involved for years to collect your income, pay your expenses, handle your investments, make decisions for long-term care, and handle all your other financial affairs.
Your Trustee is also in charge of your trust/estate when you die, which means they will be responsible for distributing your money and property to your heirs.
Trusts are often established to handle funds for many years after you die – typically for the benefit of minor/young beneficiaries or for those who have special needs. In those cases, your Trustee may be in charge of the trust for decades. But usually, a Trustee will handle things for a few months to a year or so.
Typically, to handle the average trust or estate, your Trustee will have a dozen or more meetings with various parties (beneficiaries, banks, professionals, etc.). He or she will handle dozens of calls and letters to and from beneficiaries and others and expend several dozen more hours in total time and attention to related matters.
These responsibilities will likely require time off from work and a certain amount of “grief” to get everything done. To be clear, serving as a Trustee is a responsibility and not a privilege.
Trustee Standards and Discretion
No matter what the circumstances and situation, if you become incapacitated and after you die your Trustee will have to make judgment calls and decisions involving money and property. Trustees have a lot of discretion to choose what to do, and what not to do, when and how much or how little. They are in control, they are the boss.
If you have a Trust being managed for many years after you die, you may set specific standards for your Trustee to follow in making distributions to your heirs, but to some extent, your Trustee will have final discretion on how the funds are going to be used. Be sure you have faith in his or her judgment and integrity when choosing your Trustee.
Personal Characteristics and Circumstances
Being a trustee isn’t easy. Look for these qualities in your family, long-time friends, and associates to make the right choice.
Your Trustee will have control over your assets with no direct supervision, so choosing a person you implicitly trust is a given. However, trustworthiness is not the only consideration.
A procrastinator will not make a good Trustee. You need someone who can get things done in a timely manner. People who are detail-oriented will do better than those who are not. Someone who is steadfast and firm may be better than someone who is carefree or a “pushover” because a Trustee often has to say “no” to beneficiaries and others.
A person who tends to get along with people will generally be more effective than a person who tends to butt heads with everyone they come across. A strong-willed and confident person may be a good choice, but a stubborn person who only does things his or her own way will be a poor one.
You should choose someone who gets along well with your beneficiaries, but you need to keep in mind that your Trustee may have to be the bad guy and go against their wishes or whims from time to time; this may complicate their relationship.
Free of External Pressures
Consider your prospective Trustee’s outside influences. Your sister might be a perfect choice, but if she is having serious marital difficulties or her husband is always “in and out of work,” she might not be suitable.
If your prospective Trustee is living paycheck to paycheck doing manual labor, he or she is probably not accustomed to handling and making decisions regarding large sums of money.
Good with Money
Although choosing someone because they are financially well-off or highly educated is not necessary, consideration should be given to the person’s own financial circumstances, experience, and abilities.
If you have a Trust and it is going to be held for a very long time, say for minor or young beneficiaries, or someone with special needs, you need someone who is old enough to handle things now but not so old that he or she may not be able to handle them later.
And always consider naming a backup in case your first choice is not able to serve.
What Does a Trustee Do?
Some of the actions a Trustee must take include:
1. Communicating With All Your Beneficiaries
Trustees have to stay in touch with everyone. If anything major comes up, the Trustee must timely report it to the beneficiaries. At the beginning of handling things and at least annually, the Trustee will need to report in writing to everyone, answer their questions and keep beneficiaries reasonably informed.
2. Pay Your Bills and Track Your Expenses
Your Trustee will have to sort through your financial records and determine what needs to get done. This includes organizing everything and keeping track of financial and other activities. He or she must carefully evaluate any situation that arises and attend to them fully.
3. Deal With Your Lawyer, Accountant, and/or Financial Advisor
The Trustee will need to hire people to help, including a financial advisor, accountant, real estate agent, or attorney. Your Trustee will have to communicate with all these parties regularly and effectively, as well as your financial institutions, your family, and heirs.
4. Inventory Your Property and Investments
At the beginning of handling things, your Trustee will need to put a formal list together of everything you have and their approximate value. If you have a Trust, your Trustee can handle everything privately. If you do not have a Trust Agreement your Trustee will have to deal with the probate court.
5. Manage and Sell Your Real Estate
If you own a house, in addition to making sure bills and taxes get paid, your Trustee will have to get it ready to sell. That will involve selling or distributing any personal property, hiring a realtor, and selling the home.
That can take a lot of time, so your Trustee will need to have the flexibility to handle things and be around to oversee everything.
6. Manage and Sell Your Business
Businesses and rental properties can be very challenging to handle for your Trustee when you are no longer able to do it yourself. All your business relationships, customers, clients, tenants, vendors, contractors, and employees must be dealt with, and the company may need to be wound down or sold.
If your family is going to continue operations, the Trustee must carry out whatever plan you have in place to make that happen, or he or she must figure it out. Your Trustee will need to know who to trust, and who cannot be trusted. They’ll need at least some business acumen and the ability to delegate responsibility. A tall order to say the least if you own a business or rental property and you’ll want to give the matter careful consideration and maybe even name someone special to handle it.
7. Pay Your Final Bills and File Your Income Taxes
After paying your bills and wrapping everything up, your Trustee has to file tax returns and pay your final taxes. There are deadlines involved and penalties if it does not get done timely.
8. Account to Your Heirs and Distribute Your Trust/Estate
Finally, on a regular basis, he or she will have to give a written report to your heirs (called a “Fiduciary Account”) summarizing all his or her financial and other activities. And all the while the Trustee will have to follow the terms of your Will or Trust to be sure he or she is handling everything according to your wishes.
Ultimately, your Trustee will distribute your estate to the beneficiaries.
Everyone’s Relationship to Each Other
Trustees don’t operate in a vacuum. They will be making a series of decisions that will have a large and rippling effect on your friends and family, so it’s important to think about how both good and bad decisions will play out according to their reputation and relationship to you and our other family members.
Family Members as Trustee
When choosing your Trustee, close family members should be given primary consideration. However, if you do not have a family member with suitable qualities, you may need to consider your friends or business associates like your accountant and attorney.
Non-Family Members as Trustee
Most Financial Advisors are prohibited from serving as a Trustee, but there are limited exceptions for Advisors to serve their own family. As a result, while a Financial Advisor may seem like the perfect Trustee, they are often not eligible to serve.
Your business associate will have the skill, knowledge, and experience compatible with most Trustee responsibilities, and there will be little risk of complicating inter-family relationships. And if you own a business, he or she might be best suited to either directly handle everything or to serve as an advisor and assist with the Trust process.
However, because your Trustee will have unsupervised control over your assets, you need to consider how long you have known these individuals and where your relationship and theirs may go in the distant future.
For this reason, if you are inclined to designate a non-family member as your Trustee, it is sometimes advised to use a Trust Protector.
Trustees are entitled to “reasonable compensation” under the laws of every State. While it might seem unsettling that your Trustee can just write a check for whatever amount he or she feels is “reasonable,” that usually works best for everyone.
The thing is this: the trustee can make all these decisions that impact your family and loved ones (and you) without any supervision, he or she has a very wide range of discretion and complete control over everything anyways. So, it stands to reason that your Trustee can also figure out what he or she should be paid.
But you can define the Trustee’s compensation by an hourly rate, $40 – $100/hr is common, and the way that works is the Trustee keeps track of his or her time and applies the rate to it.
If you don’t like leaving well enough alone under the “reasonable” compensation rule nor the idea your Trustee will have to keep track of his or her time, then you have the option of leaving your Trustee a lump sum of money as an inheritance (people often leave between $10,000 and $50,000 depending on the complexity of things). The benefit of this is that the lump sum inheritance will probably be tax free, reasonable compensation paid to a trustee is taxable. The problem with the lump sum approach is that depending on the situation which is really unforeseeable you might be leaving that person way too little or way too much.
One final note on Fees: Ultimately your Trustee has to account for everything to the beneficiaries, including what his or her fees are, and if the beneficiaries think the fees are unreasonable they can always object and request the fees be reduced.
A Trust Protector can oversee your Trustee’s banking, investment, and other activities without interfering on a daily basis with the decisions your Trustee must make.
A Trust Protector may be given limited or broad authority. He or she will usually not have voting power like a Co-Trustee but may have veto power over major decisions.
Your Trust Protector may also be empowered to remove a Trustee if he or she is not complying with the terms of your Trust.
The larger your estate, the more important failsafes like Trust Protectors are. People sometimes also put in a Trust Protector if for personal or other reasons they just don’t feel exactly 100% comfortable having the Trustee serving without anyone whatsoever looking over their shoulders.
You should consider the pros and cons of naming a bank as a Trustee. A Trust Bank has extensive Trustee experience and expertise with staff to handle the paperwork and professionals to handle legal and tax matters.
Perhaps most importantly, a Trust Bank also has internal checks and balances (and deep pockets), so your assets will be safe.
However, all of this comes with a cost that may be unappealing if not prohibitive. A Trust Bank may not be suitable if you have extensive real estate and/or private business interests. You must weigh the benefits and the costs of using a Trust Bank given your particular circumstances.
You will find it helpful to speak with the bank and their trust officers to determine if your situation is a mutual fit.
There are many roles your Trustee will have to play. In certain cases, it may make sense to divide responsibilities among separate, “special” Fiduciaries.
For example, if you have extensive real estate holdings, you may want to give someone with real estate experience authority to deal with just real estate matters.
Or, with an ongoing trust for young beneficiaries, you might give one person the authority to communicate with your beneficiaries and decide how to use the trust fund for them, while another person controls the investments, accounting, and other administrative responsibilities of the Trust.
Choosing the right Trustee will ensure the success of your estate plan and choosing the wrong person will lead to problems. You have a lot to consider and should not take this lightly.
After you have thought through your options you should speak with your candidates. Simply asking if they would be open to “having a role in handling financial matters if anything happens to [me/us]” might confirm or deny that person as a candidate.
And again, consulting with an estate attorney who can objectively evaluate your options given your personal and financial circumstances is highly recommended since choosing a Trustee is perhaps your most important decision.
The Easiest Way to Fund Your Trust and Keep It Funded Is by Using Software to Help
After you have chosen the right Trustee and a solid backup or two, you should ask yourself these questions:
- How will my trustee know what to do with my real estate and all my accounts when I’m gone?
- How will he or she get access to my documents and accounts?
After practicing Estate Law for over 25 years and watching hundreds of Trustees scramble to locate documents, figure out where everything is and get things in order, I developed a system to help families get their affairs in order and avoid all the fuss and delays.
LawSafe® is an online estate planning portal specifically designed to store your estate planning and other important documents for your Trustee. It has customized forms to enter all the financial and personal information your Trustee needs to know.
The LawSafe® is accessible by you anytime and your family in case of an emergency. You can designate a professional like your lawyer, accountant, or financial advisor to serve as the Gatekeeper to everything so when the time comes your family can “go through” him or her to get access.
LawSafe® is inexpensive and easy to set up and use.