Red Flags When Hiring a Professional To Be Your Trustee

When you form a trust as part of your estate plan, hiring a trustee is one of the most important decisions you will make is who will oversee the trust’s management when you are no longer able to manage it (also known as your successor trustee). Because a trustee’s work may be time-consuming, complicated, and risk liability, many people who create a trust consider naming a professional fiduciary as their trustee. Keep in mind that if you ask your estate planning attorney to serve as your successor trustee, you should ask for a separate engagement letter from the one you sign engaging them to create your estate plan. When looking to hire a professional to serve as your trustee, the following are several red flags you should keep in mind.

Do They Have Adequate Resources?

A professional’s agreement to act as your trustee does not guarantee that they have the resources needed to administer your trust properly. Be proactive about asking questions. Trust administration is an important job, and you should satisfy yourself that the person you appoint as your trustee is well-equipped to fulfill the role. The following are some of the important functions you should ask the professional about:

  • The professional you hire should have a good system for trust accounting. Trust funds must be held in a separate account that is not commingled with their business’s funds, and there must be a system in place to keep separate records of income and principal, disbursements from the account, receipts, capital transactions, and more. The professional trustee has a duty to provide information to the trust’s beneficiaries, and current income or principal beneficiaries are entitled to a detailed accounting to enable them to have a full understanding of the trust’s transactions, accounts, and property. Your trust’s funds must only be used for your matters: the professional must not use one client’s funds for the benefit of another client or to cover expenses for another client.
  • Additional recordkeeping. The professional must be equipped to handle many other recordkeeping responsibilities as your trustee, including preparing tax returns (even if they are hiring someone else to do this), handling trust-related correspondence, and keeping records of steps performed to ensure that discretionary distributions from the trust were proper. This includes information provided as a justification for a distribution request.
  • Adequate staff. A professional trustee may administer multiple trusts at the same time. As a result, it is important for their business to have enough trained and experienced staff members who are knowledgeable about trust administration to perform the necessary tasks.

Is the Trustee Accessible?

Does the trustee you are considering have enough time in their schedule to handle the responsibilities required by the trust? It is important for a trustee to be responsive and accessible, especially when the terms of the trust provide for thoughtfully evaluated distributions, such as for a beneficiary’s health, education, maintenance, and support. The beneficiary and trustee will need to communicate often if distributions are likely to be made on a regular basis. For example, if a beneficiary of the trust requests a distribution to help pay for a medical procedure, the trustee should be able to respond in a timely way, without requiring multiple phone messages or repeated requests.

Administering a trust can be time-consuming, especially if a trust has a complex distribution scheme. For example, if a special needs trust is involved, significant attention and knowledge of the beneficiary’s needs will be necessary to ensure that distributions are properly made so that governmental benefits are not lost due to mistakes in the administration of the trust. In addition, if a trust is designed to care for a beneficiary who has an addiction and distributions are to be made to support recovery, the trustee must become familiar with the situation and be willing to spend the time needed to administer the trust in the beneficiary’s best interests. If trust administration is only a small part of the trustee’s business, they may not have the time needed to handle the tasks required, including communicating with beneficiaries and other relevant parties.

Does the Trustee Have a Succession Plan?

If the trust will continue for many years, it may not be prudent to hire someone who will retire soon, especially if your trust beneficiaries are minors. Regardless of the age of the trustee, it is important to ask if the trustee has a succession plan in place, because no one can work forever. Although the terms of your trust should address who will act as a successor trustee if the trustee you initially appoint is unable to continue in the role, if your trust gives the trustee the power to designate a successor, you should ask who will step into their shoes if something happens to them.

Is the Trustee Willing to Work with Other Advocates for Your Beneficiaries?

In some situations, for example, if a beneficiary is a minor or has special needs, the trustee will need to cooperate and communicate with other caregivers. In the case of a special needs trust, for example, the beneficiary may be incapable of safeguarding their own interests. In such a situation, it is essential that there be a caregiver or advocate who can effectively communicate the needs of the beneficiary to the trustee. The trustee must have the time and willingness to maintain regular contact with those advocates.

Once you choose a professional trustee you feel comfortable with, be sure to notify them that they have been named as trustee, even if they will not have to act until you are no longer able or have passed away. Your decision to name a particular professional as trustee does not mean they must accept that position. Because being a trustee is an important role with many responsibilities and demands, notifying your choice now will avoid problems later if the professional you have chosen does not want the job, particularly if you are no longer around to appoint someone else. If your initial choice declines after you notify them, you can appoint another trustee you have vetted rather than forcing your beneficiaries to go to court to resolve the matter, which may be expensive and time-consuming.

We understand how important it is to choose the right trustee. If you need help choosing a trustee or would like us to meet with your chosen trustee to explain their role in your trust, please give us a call.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Nothing in this message is intended to provide legal advice.  This message is for educational purposes only.

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