Q: “I want to set up a trust fund for my son and grandchild, but I'm not sure who I should get to manage it?" —Judy Gillis, Crossroads, Texas
A: Once you set up a trust, you'll need someone to invest the money, maintain good records, handle taxes, and make payments to the trust beneficiaries. The person that takes on those roles is called a trustee, and your trustee (or trustees) could be a friend or family member, a financial pro, or even you, in certain cases.
Another option is a hybrid set-up: Name a trustee who administers the trust but hires an outside manager to invest the money.
Typically, the trustee's powers come from the trust agreement you establish, and he or she is legally bound to follow your directions and act in the best interest of the trust. You can specify any rules you wish, such as how much income your beneficiaries should receive. Or you can let your trustee have more discretion based on the guidelines you lay out.
“Serving as a trustee should not be considered an honor. It’s a job,” says Greg Sellers, a certified public accountant and president of the National Association of Estate Planners and Councils. “You want someone you can trust implicitly with both the financial responsibilities of managing the trust and with carrying out your desires laid out in the trust."
Here's what to consider before you pick your trustee.
What Type of Trust Is It?
If you are setting up a living trust, which is simply a trust you set up while you're alive, you can act as the trustee and keep full control of the trust’s management. This is the easiest approach. But if you don’t want to tackle this on your own, you can be a co-trustee or name a trustee to take over.
If you are creating a testamentary trust, which is set up in your will and established only after death, you will need to name a trustee.
How Big or Complicated Is Your Trust?
Choosing a family member to manage or co-manage your trust can be a good move for a small- to medium-sized trust. A relative won’t charge you a fee and generally has a personal stake in the trust’s success.
A corporate trustee such as a bank trust department, a lawyer, or a financial adviser will typically know more about trust management, investments, and taxes than a family member, so a pro can be a good choice if you have a large trust or complex assets in it. A professional trustee is also a smart choice if your trust will last for many years or generations.
Sellers advocates a middle-of-the-road approach with a relative acting as a co-trustee or trust protector, which is a person you can designate to oversee a trustee, alongside a professional trustee. This style means the trust will have both an advocate for the beneficiaries as well as an experienced manager.
A professional trustee will cost you, though. You could pay 0.75% to 2.5% of the trust assets a year. Typically, you’ll pay more if your trust is smaller, says Sellers, or if you have high-maintenance assets like apartment buildings within it. To get professional help for less, you could choose a relative as trustee and have them hire an investment company as an independent adviser rather than a co-trustee.
Who's Right For the Role?
If you want to go with a relative or friend as your trustee, choose someone who is open to learning how to handle the money, who will seek outside help if they need it, and who gets along with the beneficiaries.
Once you’ve got someone in mind, talk with him or her about the role. You don’t want someone to accept out of pressure or feelings of duty when he or she lacks the interest or will necessary to perform the job well.
Sellers also advises against naming one of the trust's beneficiaries to act as trustee. You want your trustee to manage the trust in the best interest of all beneficiaries and not have conflicting interests.