Ask the Expert Fall 2024
by Betty Andrikopoulos, CTFA, TEP
What is a trust?
A trust is a legal entity that owns and manages property for the benefit of a third party. Typically, a person (the grantor or settlor) contributes assets to a trust, which is managed by a trustee for the benefit of one or more beneficiaries.
What are the responsibilities of a trustee?
Every trust requires a trustee, the person or entity responsible for managing the trust. A trustee has a fiduciary (legally enforceable) duty to manage trust assets for the benefit of current and future beneficiaries according to the terms of the trust and the grantor’s intentions.
The trustee’s three main duties are to invest trust assets, distribute assets to beneficiaries, and administer the trust by maintaining books and records, communicating with interested parties, and coordinating tax reporting and financial operations.
The trustee role is complex and requires balancing competing interests, exercising judgement, and familiarity with asset management, tax reporting, and applicable laws and regulations. Trustees may be held liable for any breach of their duties.
Who should I select as a trustee? An individual or a corporate trustee?
The choice of trustee can have far-reaching implications for both planning outcomes and the family’s experience. Important factors to consider include:
EXPERTISE/PROFESSIONALISM
- Individual trustees are usually trusted family members, friends, or advisors and understand the grantor’s intentions and values. However, personal relationships may result in bias or pressure during difficult trustee decisions. As independent third parties, corporate trustees maintain the impartiality often required to make decisions and communicate with the grantor, beneficiaries, and other interested parties.
- Corporate trustees typically have extensive knowledge and experience in trust administration, including fiduciary obligations and the potential tax implications of various trustee activities.
- Corporate trustees have efficient access to tax, legal, investment, accounting, and other experts who may help navigate trust administration issues. Individuals may be unaware of the need for expert advice or concerned with the associated costs.
- Corporate trustees often streamline the administrative tasks associated with trust management, such as maintaining books and records, administering tax reporting and payment, and fiduciary financial statement preparation.
RISK MANAGEMENT
- Individuals may be unaware of the liability they assume as trustee, and grantors may be unaware of the risk posed to the integrity of their trust structure if an individual does not appropriately fulfill their trustee duties.
- Corporate trustees often have robust risk management and compliance systems to mitigate the risk of errors or oversights that may result in additional taxes, beneficiary claims,
or mismanagement. - Corporate trustees are registered with and overseen by state or federal regulatory bodies and are regularly examined to ensure compliance with laws and regulations.
CONTINUITY
- Individual trustees eventually resign or retire, which requires naming a successor; their personal circumstances or relationships with the grantor or beneficiaries may also change.
- As legal entities that may exist in perpetuity, corporate trustees provide an inherently more durable solution.
SITUS
- A trustee’s state of residence (individual trustee) or state of charter and principal place of business (corporate trustee) is critical; a trustee in a high-income-tax state may subject the trust to that state’s income tax.
- Many corporate trustees are located in top-tier trust jurisdictions with modern trust and business laws and favorable tax environments that support and enhance wealth transfer planning goals.
Is it possible to work with both an individual and a corporate trustee?
Yes. Several states allow the three key trustee functions to be separated among different individuals or entities through directed trust statutes. For instance, one might engage a corporate trustee to administer the trust and make distribution decisions but name a trusted person to oversee investments and select the investment firm to manage the trust’s assets.
Many families prefer the unbundled directed trust model, as it:
- Gives the grantor more control by selecting each individual or entity involved;
- Engages experts to fulfill each trustee duty;
- Decreases costs associated with traditional institutional trustees;
- Increases efficiencies in decision-making and implementation.
Conclusion
Selecting a trustee is a significant personal decision that will affect your loved ones, often the trust’s beneficiaries, as they rely on the trustee to protect and steward your family’s legacy. In my view, leading practice is to begin with a professional trustee from the outset and involve trusted persons as desired. The overall goal of estate planning is to provide peace of mind for you and your family; it is important to establish a structure that is both durable and flexible to accommodate unforeseen potential future scenarios. Your legal counsel is best positioned to help you develop the arrangement that best meets your unique goals and circumstances.
Betty Andrikopoulos, CTFA, TEP is an Executive Managing Director at Willow Street, where she collaborates with families of wealth and their advisors to establish and administer custom Wyoming trust structures. She is a UF alumna and a valued member of the UF Advisor Network.
The UF Foundation (federal tax ID number 59-0974739) is a Florida nonprofit organization exempted from federal income tax as a 50l(c)(3) publicly supported charity. The UF Foundation does not provide legal, tax or financial advice. When considering planning matters, seek the advice of your own legal, tax or financial professionals.