BACKGROUND
A trust is a legal arrangement in which a trustee manages property in a fiduciary capacity for the benefit of one or more beneficiaries. A trustee is a fiduciary, meaning they are legally required to act in the best interest of the trust and its beneficiaries.
In most states, any legally competent individual can serve as a trustee. However, trust departments of banks and financial institutions can also act as professional trustees. This article explores the advantages and disadvantages of naming an individual as a trustee.
POSSIBLE INDIVIDUAL TRUSTEES
If you decide to name an individual trustee, you have several options:
Family Members
✅ Most common choice—typically includes a spouse, adult children, or other close relatives.
✅ Maintains family control over the trust.
Close Friends
✅ A trusted friend may understand your personal values and goals for the trust.
Business Associates
✅ If you have a long-term business partner or trusted advisor, they may have financial expertise and be familiar with your assets.
Private Investment Advisors
✅ If the trust primarily consists of investments, an investment advisor may be an ideal candidate.
Attorneys & Accountants
✅ If you have worked with a lawyer or CPA for years and trust their judgment, they may be a strong candidate to oversee financial matters.
WHY YOUR CHOICE OF A TRUSTEE MATTERS
Selecting the wrong trustee can create significant problems, including:
- Poor investment decisions that reduce trust value.
- Failure to comply with tax laws, leading to penalties.
- Conflict with beneficiaries, resulting in lawsuits and disputes.
A good trustee ensures that the trust operates smoothly, maintains its intended purpose, and minimizes costs and conflicts.
POTENTIAL ADVANTAGES OF NAMING AN INDIVIDUAL AS TRUSTEE
Understanding of Your Intentions
✔️ An individual trustee may better understand your wishes compared to an institution.
Familiarity with Family Dynamics
✔️ If a trustee is a close family member or friend, they understand family relationships and potential conflicts.
Insight into Business Assets
✔️ A business associate may have specialized knowledge of a company held in trust, ensuring better management.
Potential Cost Savings
✔️ Individual trustees may charge lower fees than professional trustees (such as a bank trust department).
Personal Loyalty
✔️ A trusted individual may feel a personal obligation to honor your wishes and act in the best interest of beneficiaries.
POTENTIAL DISADVANTAGES OF NAMING AN INDIVIDUAL AS TRUSTEE
Lack of Experience
❌ An individual may not have the financial or legal expertise required to manage a trust.
Time Commitment
❌ Trustees must handle tax filings, manage investments, and make distributions—this can be time-consuming and overwhelming.
Potential Conflicts with Beneficiaries
❌ If the trustee is a family member, favoritism or disputes may arise.
❌ Naming one child as trustee may create tension with siblings who are beneficiaries.
Poor Record-Keeping
❌ An inexperienced trustee may fail to maintain accurate records, leading to legal or tax issues.
Conflict of Interest
❌ A trustee who works for a business owned by the trust may hesitate to sell assets, even if necessary.
❌ A family trustee may have personal biases affecting decision-making.
Legal Liability & Risk
❌ Trustees can be held personally liable for poor financial decisions.
❌ Individual trustees may not have liability insurance, putting their personal assets at risk.
Cost of Professional Assistance
❌ Even if an individual trustee charges low fees, they may need to hire attorneys, CPAs, and financial advisors, reducing cost savings.
Reliability & Longevity Issues
❌ Individual trustees may:
- Become ill or pass away before completing their duties.
- Lose interest or fail to perform responsibilities over time.
- Be unavailable during emergencies due to vacations or personal obligations.
👉 Solution: A trust should name a successor trustee in case the original trustee is unable to serve.
DUE DILIGENCE QUESTIONS FOR INDIVIDUAL TRUSTEE CANDIDATES
Before appointing an individual trustee, consider these critical questions:
Does the candidate have the expertise to manage a trust?
- Have they served as a trustee before?
- Do they understand investment management and tax reporting?
- Will they seek professional help when needed?
Is the candidate aware of the legal responsibilities?
- Do they understand that a trustee can be sued by beneficiaries for mismanagement?
- Are they aware of personal liability risks?
Does the candidate have a strong relationship with the beneficiaries?
- Will they listen to concerns and communicate effectively?
- Can they remain neutral and fair to all beneficiaries?
Is there potential for conflict of interest?
- Will the trustee favor certain beneficiaries over others?
- Does the trustee have financial interests in trust assets?
Will the trustee be available long-term?
- Will they be able to handle trust affairs consistently?
- Have they discussed the commitment required with an attorney?
How will the trustee be compensated?
- Will they charge a fee for their services?
- Will additional legal, accounting, or investment professionals need to be hired?
CONCLUSION
Selecting a trustee is one of the most critical decisions in trust planning. While appointing an individual trustee may offer personal benefits, it also comes with significant risks and challenges.
✔️ A good trustee will carry out your wishes with minimal cost and conflict.
❌ A poor trustee can create legal, financial, and emotional stress for beneficiaries.
Key Takeaways:
🔹 If selecting an individual trustee, ensure they are capable, neutral, and responsible.
🔹 Consider naming a successor trustee in case the original trustee is unable to serve.
🔹 If trust complexity is high, a corporate trustee or co-trustee arrangement may be more beneficial.
By carefully evaluating trustee candidates and asking the right questions, you can ensure your trust is well-managed and serves its intended purpose.
This article is for informational purposes only and does not constitute legal, tax, or investment advice. For professional guidance, consult an attorney or tax professional.
Investment advisory services are offered through CWM, LLC, an SEC Registered Investment Advisor. Carson Partners, a division of CWM, LLC, is a nationwide partnership of advisors. The views in this article do not necessarily represent those of CWM, LLC. Information is based on sources believed to be reliable; however, accuracy cannot be guaranteed.
