By FPA member Robert DiQuollo, CPA, CFP®
Last Updated: July 12, 2010
A trust allows you to leave money to your children or other loved ones only when they are old enough to handle it. However, the success of a trust absolutely depends on the trustee or trustees you choose to manage it.
Naming a relative as a trustee may be a bad idea. Relatives can bring a lot of emotion to a situation. A friend can be an appropriate trustee as long as he or she has the right level of business acumen and ability to protect, preserve and grow the assets in the trust.
It’s best to work with your legal or financial adviser to find an individual — possibly a third party non-family member — to act as trustee, whom you have known for years and trust implicitly. If there’s no one like that, they may recommend that you hire a professional trustee, such as a bank, Certified Public Accountant (CPA) or financial adviser.
Trustee fees are set by the state and generally operate on a sliding scale based on the size of the estate. Banks have set fee maximums according to state law. However, the person establishing the trust may be able to negotiate lower fees with either a bank trustee or an individual trustee.
Managing a trust takes real expertise. The trustee(s) must have two distinct management abilities — administrative and financial. Some common mistakes on the administrative side include:
- Not staying on top of administrative duties — e.g. tax returns, etc.
- Favoring one beneficiary over another
- Not providing an account summary to beneficiaries on a regular basis
- Not being transparent/communicative to help beneficiaries keep their expectations in line
A trustee can be a superb administrator but a poor money manager. A common mistake is not having a diversified portfolio that includes the right proportion of stocks, bonds, and alternative investments such as real estate and commodities to maintain the assets with as little volatility as possible — and yet grow the portfolio in the long run.
To provide maximum protection for beneficiaries, original trust documents should specify two or even three trustees — one of which may be your financial planner or an attorney. If you use a bank with a reputable trust department or any other third party to the family, the document should specify that in a multiple-trustee situation the individual trustees have the ability to remove any institution (i.e. bank or attorney) and replace it with another.
An individual trustee can also ask the instituion to change the employee responsible for the trust if things aren’t running smoothly. And individual trustees also can be replaced for nonperformance.
FPA member Robert DiQuollo, CPA, CFP®, is President, Senior Financial Advisor of Brinton Eaton in Madison, N.J.