If you hope to leave money to your descendants — but want a say in how that money is used — a family trust can let you exert control from beyond the grave. But your choice of who serves as trustee after you’re gone can dramatically influence how closely your wishes are carried out, as well as whether your children or grandchildren end up feeling grateful for your generosity and foresight — or squabbling over how the funds are spent. That trustee choice is one of the basics of good estate planning.
Unlike the executor of your estate, whose job begins at your death and ends when assets are distributed, the trustee of a family trust has ongoing responsibilities to oversee distributions, handle reporting requirements, manage investments and pay taxes each year. They must communicate with all the beneficiaries of the trust, ensure everyone understands the purpose of the trust and their own responsibilities and handle any disputes or questions that arise.
But not everyone is well suited to — or ready to shoulder the burden of – these duties.
Leave money to your descendants the right way
“How assets are distributed becomes a touchy subject,” says Zaneilia Harris, a financial planner based in Upper Marlboro, Md. “Setting up the trust right can avoid your heirs going to court or having fights among themselves.”
“Being a trustee can be a large and thankless job where even the simplest things can run off the rails,” says John M. Goralka, an attorney in Sacramento, Calif. One of his clients agreed to serve as a trustee — declining payment — for his elderly neighbor who was sick because relatives from out of state had moved into the neighbor’s house and started pilfering belongings. But after the neighbor’s death, things really got bad. The house went to two siblings equally, but one of them moved in and started acting oddly in addition to dealing drugs in the neighborhood.
The trustee “was on speed dial with the police,” Goralka recalls. “The brother was walking around the neighborhood with a bathrobe on, talking to the mop.”
To avoid a nightmare scenario like this, you can take a few key steps.
Pick the right trustee(s)
Typically, you’re the trustee for a revocable trust as long as you're capable. You also name a successor trustee who becomes trustee after your death and, at that point, the trust becomes irrevocable. When choosing a successor trustee, the primary options are a family member, friend, professional trustee or a bank trustee. Regardless of the type, any trustee acts as a fiduciary and is subject to government oversight and rules. There are pros and cons to each choice.
The three most important character traits for a trustee, according to Goralka, are honesty, the ability to follow through on many details in a timely manner and communication skills. If you decide to have two co-trustees, add a professional trustee as a third vote in case of ties.
“The biggest area that creates problems in trust administration is failure to communicate,” Goralka says, such as not letting beneficiaries know if state laws or bank requirements are holding up funds. “If somebody is waiting for their money or nobody tells them what’s in the trust, the silence can be deafeningly loud.”
A family member or friend will likely know you and the trust beneficiaries best and be able to handle delicate situations. They may be more available to explain the trust and to make distributions in emergency situations — unlike a bank trustee, which may be a committee that only meets two or four times a year to approve distributions.
Choosing a friend or family member as a trustee has a few possible downsides. They might move away or grow distant in the years between setting up the trust and your death. Or your choice might alienate other family members, especially if you select someone unexpected — such as putting a younger sibling in charge of older siblings.
Candice, 54, a preschool teacher in Potomac, Md., and youngest of four, disapproves of her mother choosing the next oldest sibling, her brother, to serve as trustee. “She knows we don’t get along, which is why I’m like, ‘How can you choose him?’ ” says Candice, who asked to be referred to by one name to avoid harming family bonds. “It has not helped our relationship.”
A bank or professional trust might be a better option to avoid this kind of friction. Another reason to ask a professional to be a trustee is if a family member or friend could have a conflict of interest by being a trust beneficiary or being swayed by personal relationships. A professional could also bring more experience and knowledge of finances, investing and trust and estate law.
A professional trustee, such as those recommended by the National Plan Alliance, can be more affordable and flexible than a bank trustee, who typically charges thousands of dollars a year or up to 1.5% of assets under management. You can find a professional trustee at many nonprofit organizations that provide services related to disability or elder care. Availability and cost depend on your state and the services needed but can be as low as a few hundred dollars a year.
On the downside, professional and bank trustees may have limited hours or availability to take questions. Some bank trustees may steer funds to investments in their own trust departments, limiting the potential earnings. However, professional trustees generally carry insurance policies that would reimburse your beneficiaries in the case of misallocation or mismanagement of funds.
Communicate about assets and your wishes
Once you’ve chosen a trustee, you can make things easier for that person by listing all the assets you want in the trust and ensuring the trust is properly named as the beneficiary for those accounts. A trust and estate lawyer should draw up the trust documents so that your wishes are clear and the trust's purpose aligns with state law. Make sure everyone knows where the trust documents are and that each person — and your estate attorney — has a backup.
Have a family meeting to talk about estate planning with all trust beneficiaries. Explain what the trust is for, your wishes for its use and your reasoning for choosing the trustee(s). “Use language that’s not negative about why you’re choosing someone,” says Goralka. At the same time, be careful not to open the door for a lawsuit if you give a reason that a disgruntled relative could dispute. “You want to make sure you have good family dynamics in place.”
Additionally, it can help to write a letter explaining your goals and values so that your trustee has more information with which to make decisions about circumstances that you didn’t foresee. For example, perhaps the trust is intended to pay for your descendants’ educational expenses and career training, but one of your grandchildren decides to start a small business instead of attending a traditional four-year college. If your trustee knows that you value entrepreneurship as long as the individual has a solid business plan, they can be more comfortable distributing trust money for that purpose.
Mindy Greiling, 76, an author and retired state legislator in Roseville, Minn., and her husband Roger, 80, named their daughter Angela, 49, as successor trustee for a trust to benefit their son Jim, 48, who has schizophrenia. While Jim is currently stable and managing his finances responsibly, in the past, he ran up hundreds of thousands of dollars of credit card debt. The trust specifies allowable uses, like healthy food, annual family trips, dental procedures, prescription drug costs not covered by Medicaid and other expenses beyond day-to-day living costs.
“We’re a family who talks things out and we’re not afraid to talk about death. It’s such a peace of mind to know that Jim will be provided for,” says Greiling, who didn’t choose a professional trustee because she wants Jim to work with someone who cares about him and is more available to support his needs. “We picked Angela purposely because she’s very responsible, trustworthy, conscientious and free.”
Stay current
Indeed, trusts are a terrific way to provide for a relative who has a disability. They protect assets from creditors and avoid the disabled relative losing government benefits because of a direct inheritance. The Greilings initially set up the trust because Mindy’s mother wanted to leave her grandchildren an inheritance, but if Jim received more than about $2,000, it would disqualify him from receiving Social Security disability payments.
Make sure that you account for these kinds of special circumstances when planning the trust and picking a trustee — and regularly update documents just in case something has changed.
In addition to choosing a trustee or trustees, select additional successor trustees in case someone dies, becomes incapacitated or is otherwise no longer available. “Life is unpredictable. You don’t know what’s going to happen,” Goralka says.
Sarah, 57, a social worker in Virginia who asked to be referred to by one name to avoid causing family friction, found out the hard way about the cost of using the wrong trustees. Sarah's grandparents appointed her mother and uncle as trustees of a family trust along with their attorney, but there was no successor trustee. The attorney died in a plane crash and the brother resigned, leaving Sarah's mom struggling to find documentation and comply with tax and reporting requirements. Then Sarah's mom died, naming Sarah her successor, and the COVID lockdown made everything harder.
“It’s one big mess that I now have to untangle all by myself,” she says. “My mother and my uncle did not follow the trust instructions for a distribution that they made over a decade ago. That distribution has to be corrected before the trust can be closed and the final tax return completed.”
As Harris observes: “You should revisit the family trust every three to five years to make sure these are the same people you want to be in the different positions you’ve allocated in the trust.”
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
