When a trust is formed, one of the many decisions that must be made by the “settlor” (the one who forms the trust) is who will serve as trustee. The settlor may also select multiple trustees (“co-trustees,” who serve with each other) and later (“successor”) trustees (who may serve after the original trustee can no longer serve [death, disability, etc.] or for some other reason [resignation, removal, etc. of the original trustee].
The selection of trustee is an important one because they have a fiduciary obligation to carry out the terms of the trust and the desires of the settlor. Because the trustee exercises great power and discretion over money and property, the pros and cons of family member trustees vs institutional trustees should be considered. Trust disputes often relate back to whom, and how, was selected to serve as trustee.
FAMILY MEMBER TRUSTEES
Family members such as spouses and children are frequently named as trustees, but this selection occasionally results in trouble down the road due to sibling rivaliries and the trustee’s lack of knowledge and experience.
Advantages of family member trustees include a familiarity with the beneficiaries, and possibly the trust property as well; and a common willingness to serve with little or no compensation.
Disadvantages of family member trustees include an inability or disinclination to carry out the duties of a trustee; favoritism or unfairness toward certain beneficiaries; the need for a successor trustee at the resignation, incapacity, or death of the trustee; the lack of insurance coverage in case of liability; and tax consequences if the trustee is also a beneficiary.
INSTITUTIONAL TRUSTEES
Institutional trustees include such entities as banks and trust companies, which have their pros and cons as well.
Advantages of institutional trustees include expertise and competence at carrying out trustee duties, such as adherence to the prudent investor rule; impartiality with regard to trust property and beneficiaries; avoidance of the problem of successor trustees; the possibility of additional services such as tax reporting or money management; and sufficient insurance coverage in case of liability.
Disadvantages of institutional trustees include greater administrative costs; a lack of familiarity with the beneficiaries ; and an inability to administer certain types of trust property, such as real estate.
Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.
