Navigating the Trustee Decision-Making Process: Making a Personal Choice with Lasting Impact

Kelly Johnston, CTFA, CWS, Senior Managing Director, Senior Trust Officer, First Republic Trust Company

Choosing a trustee may seem like an easy decision, but there is much more to consider than most of us realize. Whether you already have a trust in place or are just beginning the estate planning process, it is important to understand the role of a trustee. Only after you understand the responsibilities are you truly prepared to consider the alternatives and make the right choice.

WHAT IS THE ROLE OF A TRUSTEE?

A trustee has many responsibilities, the first of which is to carry out the wishes of the settlor. According to the Probate Code, the trustee must understand the terms of the trust and its objectives, administer the trust solely in the interest of the beneficiaries, and avoid conflicts of interest. They must protect and preserve trust assets. The trustee also has a duty to keep trust assets properly invested and hold investment managers accountable to defined standards. They must keep the beneficiaries informed and advise them of any rights to withdraw assets, request discretionary distributions or participate in trust decisions. They must maintain accurate records and provide periodic accountings to beneficiaries. One of the most important responsibilities of a trustee is to exercise discretionary powers reasonably and impartially.

WHO SHOULD TAKE ON THE ROLE OF TRUSTEE?

Based on these and the many other responsibilities of a trustee, it can be difficult to find a person who is qualified and prepared to take on the role.

1. Friend or Family Member

Often individuals are named because the settlor wants someone who knows the family history and dynamics—and that they can trust. On the other hand, someone who has been emotionally involved with the family may find it difficult to make objective decisions as a trustee, especially when making discretionary distribution decisions for a beneficiary who is his or her sibling, niece or stepchild. Another disadvantage to choosing an individual is longevity. If a trustee becomes ill or passes away, your trust beneficiaries may experience a delay in receiving their distributions, trust assets may go unmanaged for some period of time or a filing deadline could be missed. People are also busy with their own careers or families and cannot dedicate the time and attention required to be an effective trustee. More importantly, it is rare to find an individual who has all of the expertise required of a trustee. If your friend or family member is not an investment advisor, property manager, tax expert, estate planning attorney and family counselor, he or she will likely have to hire several others to take on those responsibilities.

2. Private Professional Fiduciary

If a friend or family member is not the best option, what other choices are there? One alternative is to name a Private Professional Fiduciary. A Private Professional Fiduciary is someone who is licensed by the State of California to act as a trustee and typically has a background in one of the important areas of trust administration. Some will charge an hourly rate, making them a less expensive option than a corporate trustee in certain circumstances. However, private professionals still hire out many of their fiduciary responsibilities, which can add up quickly. When a professional becomes ill or passes away, who will take care of the trust assets and your beneficiaries? When considering a Private Professional Fiduciary, you need to make sure your trustee has a successional plan in place.

3. Corporate Trustee

A third option is a corporate trustee. A corporate trustee is a trust company or bank trust department that specializes in trust administration. A corporate trustee is often overlooked as an option when people are choosing a trustee. Many people simply are not aware that a bank will act as trustee, and they dismiss the idea because they assume it will cost too much. However, there are many advantages to using a corporate trustee. One advantage is they have the requisite expertise in-house, which means they have to hire out much less often than an individual or private professional. Another advantage of a corporate trustee is that your beneficiaries have a team, usually a trust officer, portfolio manager, real estate expert and a banker, who are all familiar with the terms of your trust, your beneficiaries and your wishes. If something happens to one of them, there is no disruption in service to your beneficiaries.

If you want the breadth and depth of expertise as well as the continuity provided by a corporate trustee but also the benefit of the family history and dynamics associated with a family trustee, consider naming the bank and the family member as co-trustees. This alternative allows the corporate trustee to perform the bulk of the trustee responsibilities, relieving your family trustee of much of the burden, while incorporating the family trustee’s valuable insights into the decision-making.

Each alternative has its pros and cons, and choosing a trustee is a personal decision. Consider your choices carefully, and interview several trustees before making a decision.

First Republic Private Wealth Management encompasses First Republic Investment Management (“FRIM”), First Republic Trust Company (“FRTC”), First Republic Trust Company of Delaware LLC (“FRTC-DE”), and First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC. FRIM is a SEC Registered Investment Advisor. This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client’s expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. This document may not be reproduced or circulated without our written authority. The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that FRIM and FRSC do not provide tax advice. The levels and bases of taxation can change. Investors’ tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document. Accordingly, you and your attorneys and accountants are ultimately responsible for determining the legal, tax and accounting consequences of any suggestions offered herein. Furthermore, all decisions regarding financial, tax and estate planning will ultimately rest with you and your legal, tax and accounting advisors. Any description pertaining to federal taxation contained herein is not intended or written to be used and cannot be used by you or any other person, for purposes of avoiding any penalties that may be imposed by the Internal Revenue Code. This disclosure is made in accordance with the rules of the Treasury Department Circular 230 governing standards of practice before the Internal Revenue Service. Products and/or services offered by First Republic Securities Company, LLC, and First Republic Investment Management are not deposits or obligations of, or insured, guaranteed or endorsed by any bank, Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency, entity or person. The purchase of securities involves investment risks including the possible loss of principal. The opinions expressed herein are solely and exclusively the opinions of the Investment Adviser Representative of the Adviser or Trust Officers of First Republic Trust Company or First Republic Trust Company of Delaware LLC, as the case may be, and are not associated with the Broker-Dealer (First Republic Securities Company, LLC). First Republic Securities Co., LLC does not offer investment advice or market commentary.