When Selecting a TrusteeThe most important qualities are honesty, stability, dependability, organization, financial experience, and the ability to devote time and energy on an impartial basis for the benefit of all Beneficiaries. The Trustee is the most pivotal and critical part of any Trust Agreement.

Selecting a trustee is very important. So choose wisely. Read on to learn the aspects that constitute a trust and how selecting a trustee should be decided upon by you.

The Concept of a Trust Agreement

A Trust is a written contract between the Grantor and the Trustee for the benefit of all Beneficiaries, which can include the Grantor and anyone else he chooses, including spouse, children, grandchildren, friends, or charities.

A Trust can be created during one’s life or by will upon death. A trust that is created at death by virtue of a will is referred to as a Testamentary Trust by the “Testator” (the deceased individual). A trust created during the life of an individual is referred to as the “Settlor,” the “Grantor,” or “Trustor.” The Trust instrument is referred to as “inter vivos,” formed during the life of its creator.

A Trust is an integral part of any estate plan for the purpose of avoiding the Probate Process, minimizing the impact of taxation on the transfer of wealth from one generation to another or from one individual to another, or protecting against unwanted and unpleasant potential events like a lawsuit. A Trust can financially provide for a spouse, a minor child or children, yet unborn children, an incapacitated or disabled person, or persons incapable of managing their financial affairs. A Trust must have enough provisions to adapt itself beyond the life of the grantor(s), and the Trustee is at the center of the goals of the Trust creators.

Once a Trust is created, it becomes the new legal titleholder of assets either transferred to the Trust as a gift or as a sale. In order to avoid fraudulent conveyance, the individual giving up their legal right to possession or title must receive equal fair cash value at the time of the transfer.

Otherwise, it is considered a “fraudulent transfer” to the detriment of all potential creditors or a gift subject to a gift tax.

The Gift Tax on Taxable Gifts

The gift tax applies to the fair cash value given up at the time of the transfer (not the amount originally paid). Taxable gifts are reported on IRS form 709 and are taxable to the person giving up the right of possession by gifting their assets.

The person receiving the gift (in this case, the Trust) always receives the gift tax-free. The person giving the gift is taxed on it unless it is less than $12,000 per person (as per 2006 tax laws).

Trustee’s Power Derived from Grantor

A Trust can be revocable or irrevocable, grantor or non-grantor.

• Revocable Trust – The “Grantor” retains the power to “void” the Trust Contract.
• Irrevocable Trust – The Grantor severs all power of possession, and the legal title to own the Trust is vested exclusively with the Trustee.

The Trustee’s power is derived from the Grantor(s) by a written agreement (Trust Agreement). The most important person, therefore, is the Trustee.

Consequences When Grantor Names Himself Trustee

If there is a provision in the Trust Agreement allowing the Grantor to name himself as the Trustee for his list of Beneficiaries, including himself, he runs the risk of frivolous liability and harsh tax consequences. This is because he has essentially appointed himself to judge his own decisions.

Factors to Consider When Choosing a Trustee

A true Trustee is an independent person, not related to the Grantor(s) by blood or marriage, or an independent trust company, bank, or corporate body. Selecting a Trustee is the most significant part of any Trust Agreement.

Consider these factors when choosing a Trustee:

1. Location of the assets (e.g., real estate requires knowledge of financial and tax implications).
2. The physical location of the Trustee in relation to the Beneficiaries.
3. The types of assets (tangible, intangible, cash, or near cash).
4. Relationship of the Trustee to the Grantor’s family.
5. Understanding of family dynamics among Beneficiaries.
6. Familiarity with financial management and decision-making.
7. Financial ability and experience with asset management.
8. Business knowledge, especially for family businesses.
9. Willingness and ability to serve as an impartial fiduciary.
10. Legal capacity to interpret and administer the agreement fairly.
11. Willingness to accept potential legal liability from Beneficiaries.
12. Succession planning for a successor Trustee.

Some Bad Trustees

When choosing a Trustee intended to last longer than the life of the original Grantors, certain types of Trustees may not be well-suited for the role.

Less Suitable Trustees:

1. Corporate Trustees or Trust Companies – These are often slow, bureaucratic, and impersonal. They focus on numbers rather than Beneficiaries’ needs.
2. Banks as Trustees – Ultra-conservative, slow decision-making, and risk-averse.
3. Lawyers – While legally knowledgeable, they generally lack financial management expertise.
4. Accountants – Good at keeping financial records but lack long-term investment foresight.
5. Family Members as Trustees – Risk of mistrust, potential conflicts, and family disputes over money.

Selecting a Trustee is Complicated

Selecting a Trustee can be complex. Many individuals are reluctant to assume fiduciary responsibilities, even when compensation is offered.

Some Grantors opt for co-Trustees or Trust Protectors to ease the responsibility. This ensures that the Trustee has someone for consultation, particularly someone close to the Grantor’s family.