Keith Mack
A trustee is a person who is legally obliged to manage and use property, money, or assets for the benefit of someone else. The role of a trustee can be taken on by a family member, a professional, or a corporate trustee. While it is common for family members to be chosen as trustees, there are several legal, financial, and interpersonal considerations to take into account when selecting a trustee. This includes the potential for emotional entanglements, the risk of mismanagement, and the specific skills and knowledge required to fulfil the role effectively.
| Characteristics | Values |
|---|---|
| Trustee's role | Managing money and other assets, making payments to beneficiaries, adhering to rules and guidelines in the trust document, and maintaining accurate records |
| Trustee selection | Family members are commonly chosen due to their knowledge of family dynamics, shared values, and ability to waive fees |
| Considerations | Potential for family conflict, emotional entanglements, and inexperienced decision-making; need for checks and balances, outside assistance, and impartial advice |
| Trustee removal | The trust instrument should allow for removal and replacement of trustees during and after the client's lifetime |
| Professional involvement | Professionals provide oversight, expertise, and impartiality, ensuring compliance with technicalities and settlor's intentions |
| Trustee fees | All trustees, including family members, are legally entitled to a fee; outsourcing services incurs additional costs |
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What You'll Learn
Pros and cons of family members as trustees
Choosing a family member to serve as a trustee can be a double-edged sword. While it is a natural choice for many, as it involves a person with whom the client shares common values and a sense of the family legacy, there are several pros and cons to consider.
One of the main advantages of selecting a family member as a trustee is the insider's knowledge they possess. They understand the family dynamics and history, which can help navigate emotional issues that may arise during trust administration. Additionally, family members often forego fees, making them a more cost-effective option compared to professional trustees.
However, one of the significant disadvantages of choosing a family member is the potential for conflict within the family. Naming one family member over another can create hurt feelings and even aggravate existing tensions. Moreover, the management or mismanagement of trust assets by a family member can lead to serious family strife and litigation driven by emotion.
Another benefit of selecting a family member as a trustee is the sense of control and influence it provides to the family. With one of their own managing the trust, the family may feel they have more say in the nature and timing of distributions. This can be advantageous if the family member has the necessary skills and knowledge to act in the family's best interests.
On the other hand, a family member acting as a trustee may lack the expertise and experience required to fulfil the role effectively. The role of a trustee is complex and time-consuming, and a family member may struggle to balance it with their other commitments. Additionally, a family member trustee may unintentionally engage in a conflict of interest, benefiting themselves or their family to the detriment of the trust.
In conclusion, while choosing a family member as a trustee can provide benefits such as insider knowledge and cost savings, it is important to carefully consider the potential drawbacks, including family conflict and the risk of mismanagement. It may be prudent to seek outside assistance or guidance from professionals, even if a family member is serving as a trustee, to ensure the proper administration of the trust.
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Trustee law and family dynamics
However, appointing a family member as a trustee can have significant implications for family dynamics. The selection of one family member over another can create resentment, aggravate existing tensions, and lead to hurt feelings among those who are not chosen. Moreover, the management or mismanagement of trust assets by a family member can result in serious family disputes and litigation driven by emotions. It is important to consider the potential impact on family relationships and implement checks and balances within the trust documents to prevent unintended consequences.
To mitigate these risks, individuals can consider appointing multiple trustees to serve simultaneously, requiring unanimous or majority decisions. Alternatively, a professional trustee, such as a bank or trust company, can be appointed. Professionals bring expertise and impartiality to the role, ensuring that technicalities are navigated successfully and the settlor's intentions are fulfilled. A combination of a family member and a professional trustee can also be considered, allowing for both intimate knowledge and professional guidance.
Regardless of the approach taken, understanding the duties and responsibilities of a trustee is essential. Trustees are responsible for holding, managing, and distributing assets in accordance with the trust's rules and the beneficiary's best interests. They must also maintain accurate and timely records for tax filings, court reports, and public benefit maximization. By comprehending these responsibilities, individuals can make informed decisions about trustee appointments, ensuring the effective administration of their trust and the preservation of family harmony.
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Trustee removal and replacement
Understanding the Role of a Trustee
Trustees are legally responsible for managing the trust's assets and making distributions to beneficiaries. They must act honestly and in good faith, always keeping the beneficiaries' best interests in mind. Trustees are held to a higher standard of conduct when managing someone else's money compared to their personal finances. It is a demanding and time-consuming role, and trustees are legally entitled to a fee for their services.
Reasons for Removal and Replacement
Trustees may need to be removed and replaced due to misconduct, negligence, prioritizing personal interests over beneficiaries, misuse or misappropriation of assets, or conflict of interest. Even a minor offence should not be taken lightly, as it could lead to more significant issues in the future.
Your Rights as a Beneficiary
As a beneficiary, you have the power to remove and replace a trustee, which is one of your most important rights. This can be done through a beneficiary petition, which is the most common way to remove trustees. If you are the creator or a co-trustee of a revocable trust, you have even more control and can amend the trust agreement to remove or replace a trustee.
Steps to Take
If you are considering removing a trustee, it is essential to review the terms of the trust agreement and consult with a probate or estate planning attorney. You may need the agreement of all or a majority of the beneficiaries, depending on the trust's structure. The next step is to file a trustee removal petition with the court, detailing the trustee's violations or breaches of duty.
Alternative Options
Before resorting to removal, beneficiaries can try raising their concerns directly with the trustee, as some issues may be resolved through open communication. Additionally, consider implementing checks and balances within the trust agreement, such as appointing a trust protector to review the trustees' actions or having multiple trustees serve simultaneously to provide oversight.
Remember, while it can be challenging, especially within a family context, taking swift action to remove an unfit trustee is crucial to safeguard your inheritance and honour the intentions of your loved one.
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Trustee compensation
While it is common for family members to serve as trustees without compensation, receiving only reimbursement for reasonable expenses, some family members do receive compensation for their services. This compensation can be in the form of a fixed fee, a percentage of the trust assets, or another form as outlined in the trust agreement. The amount of compensation for family member trustees can depend on a range of factors, including the structure of the trust, the beneficiaries, and the services provided by the trustee.
If the family member trustee is also a beneficiary, they may choose to forgo compensation to reduce potential family conflicts and lower the tax burden, as trustee compensation is taxed as ordinary income, while inheritance is generally not taxed. On the other hand, if the trustee's duties are time-intensive and complex, involving tasks such as investment management, distributions, and accounting, compensation may be expected and appropriate.
It is important to note that beneficiaries have the right to challenge trustee fees in court if they are unhappy, and trustees can also appeal to the court for higher payment if they believe they are entitled to more compensation. To ensure transparency and avoid conflicts of interest, it is crucial to understand the trustee fee structure and have a clear understanding of trustee fees and compensation before appointing a trustee.
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Trustee duties and responsibilities
Trustee law can apply to a family member, and it is a common choice for clients to select a family member or close relative as their trustee. This is because the client is likely to share common values and a sense of the family's legacy with the family member, and therefore, the trustee will be able to understand the client's goals and objectives in establishing the trust. A family member will also have insider knowledge of the family's history and dynamics, which can help navigate emotional issues that may arise during trust administration.
Being a trustee for a family member comes with important duties and responsibilities. The trustee is responsible for managing the assets in the trust, which includes managing money. The trustee must act with undivided loyalty to the trust and its beneficiary, diligently pursuing the intentions of the grantor (also called the settlor, trustor, creator, or trustmaker) as laid out in the trust document. The trustee must also act reasonably and competently in all matters of the trust, taking certain actions to control, segregate, earmark, and protect trust assets.
One of the key duties of a trustee is to ensure prudent management of the trust assets, giving the trust their personal attention and accounting to the beneficiaries. This includes maintaining accurate and timely records, especially for tax filings, court reports, and maximizing public benefits. The trustee must also be transparent and disclose any conflicts of interest.
In the case of a special needs trust, the trustee must be familiar with the rules and guidelines governing how beneficiaries can spend their money to remain eligible for public benefits. They may also need to make decisions regarding housing and caregiving for the beneficiary, such as whether they require a group home or a family member or professional caregiver.
It is important to note that a trustee is legally responsible for ensuring that all necessary steps are taken, even if they retain outside assistance for services such as tax return preparation, annual accountings, and investment review. Trustees are entitled to a fee as a matter of law and should not be compelled to serve without compensation.
To fulfill their duties effectively, trustees can seek guidance from professionals, such as attorneys or financial advisors, and refer to the trust document for specific instructions and guidelines.
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Frequently asked questions
Yes, a family member can be a trustee. In fact, most people use family members for their trustees for their family trusts. Usually, the surviving spouse is named the successor trustee to the deceased, then the children, either all of them or the one with the most business/finance experience. However, it is important to consider the effect that naming one family member over another may have within the family.
A family member will have an insider's knowledge of the family's history and the dynamics that exist among family members, which can help navigate emotional issues that arise during the course of trust administration. A family member may also forego imposing a fee while serving as a trustee.
Serving as a trustee requires specific financial and legal knowledge and expertise. A family member may not have the required skills or resources and may have to outsource services, which will be paid for by the trust. Additionally, a family member may have a change of heart and ask for compensation, which can result in lawsuits and damaged family relationships.
