How to Make Your Most Important Decisions: Choosing Trustees and Executors

Estate plans consist mostly of documents, but whether or not a plan is successful usually is determined by the key people who administer it. Yet, decisions about who those people will be often aren’t made carefully.

There are two key appointments for financial matters in most estate plans. One is the trustee or trustees of any trusts. The other is the executor or personal representative in charge of settling the estate.

A mismanaged trust or estate results in significant problems for loved ones such as excess costs, poor investments, low payouts and unresponsiveness to the family’s needs. Of course, appointing the wrong person can lead to fraud or theft.

An estate is overseen by the probate court or similar court, giving beneficiaries the ability to complain and ask for changes. But trustees generally operate without oversight. In many states, beneficiaries are not entitled to regular reports from the trustee. Often, people don’t even have a right to be told they are beneficiaries of a trust.

When beneficiaries take legal action against the trustee, the trust fund assets pay the legal expenses of the trustee, compounding the costs to beneficiaries.

To avoid the problems, you need to choose carefully when appointing executors and trustees.

The basic choices when selecting a trustee or executor are a family member, a family friend, an advisor (such as a lawyer or accountant) or a professional (such as a trust company). The best choice often depends on your goals, the details of your plan, how complicated the trust or estate is and family dynamics.

Family and friends can be the best choice when the composition of the estate or trust is relatively straight forward, and the goal essentially is to transfer assets over a fairly short time to the beneficiaries. The job of the individual is to preserve the principal and assets, distribute enough to maintain the standard of living of the beneficiaries during the settlement period, and transfer the principal to the beneficiaries at the appropriate time.

It often is best to appoint someone who knows the family, such as a family member or friend. They’re likely to know the appropriate lifestyle to support and have some idea what you would want done in different situations. The investment decisions for this type of estate or trust often are straightforward.

The person should have some financial knowledge, experience and sophistication, because the unexpected often happens when settling an estate or winding down a trust. An alternative when appointing someone with modest financial abilities is to ensure they are advised by an attorney or other professional throughout the process.

When a trust or estate has multiple beneficiaries, be alert for potential conflicts of interest or appearances of conflicts. You don’t want the other beneficiaries to become suspicious of the one administering the estate or trust.

The choice is more difficult when an estate or trust has complicated or illiquid assets, such as real estate, a family business or a significant collection. Most individuals don’t have the background to handle such assets, and it can take longer to settle matters.

But many trust companies and other professionals also might lack the expertise. At best, they’ll agree to serve but will hire a consultant, at the expense of the trust or estate, to help make decisions.

Often, the best decision in these situations is to appoint more than one person as trustee or executor and divide the responsibilities. You might name a family member, friend or longtime professional advisor as the main person in charge. But appoint a professional, or recommend the trustee or executor hire a professional to handle the unique assets or other issues.

When considering a non-professional trustee of a trust that’s likely to operate for years, there are several qualities the person needs.

Of course, the trustee should have the financial expertise and any other knowledge needed to manage the assets. The exact qualities needed depend on the assets in the trust, how long the trust will last and your goals.

When your family business is in the trust, you need someone who knows the business well and has the experience to oversee it, even if others are in charge of day-to-day management.

A trust that contains traditional investments, such as mutual funds and stocks, needs less financial expertise. The person needs to be able to either manage the portfolio well or hire and oversee a professional to handle the investments.

Non-financial skills also are needed for most estates and trusts. Often, the executor or trustee has discretion over the amount of money or the assets to distribute or when to make distributions.

A beneficiary, or the beneficiary’s guardian, often asks for additional or advance distributions. The requests can become frequent, and discussions heated. That’s especially the case when a trust is set up to last for years and distribute assets gradually over time.

A trustee might need to patiently explain why additional distributions are not being made, either because they would violate the trust terms or would, in the trustee’s view, not be in the beneficiary’s best interests. The trustee also needs to be able to make these decisions without being influenced by past feuds, biases, pleas or other personal history.

The trustee or executor also might be asked to explain investment decisions. A beneficiary, for example, might expect a higher rate of return than the assets are earning.

When you suspect these conversations could be frequent, then you probably want a non-family member as trustee or executor.

Professional trustees have their advantages. When a trust might have complicated aspects, a professional has the resources to be able to administer it properly, such as accounting systems, tax advice and efficient custodial services.

Another advantage of a professional trustee is continuity. The professional trustee tends to be a corporate entity, so it will survive any individual.

Professional trustees are regulated. Their books and practices periodically are reviewed and audited. Professionals also are likely to have deep pockets and insurance that can be tapped if someone acts improperly and costs the trust or estate money.

There can be disadvantages to a professional. A professional (whether a bank, trust company, financial advisor or someone else) isn’t likely to have the family knowledge that may be helpful.

A corporate trustee also could have frequent personnel changes that make it less likely the individual acting as trustee in a few years will have firsthand knowledge of you and your intentions or of your family.

Whether you select a professional or someone else, plan on compensating the trustee for all but the simplest trusts. Being a trustee is a lot of responsibility and involves keeping records, filing tax returns, investing assets and making distributions. Most professional trustees receive a fee of about 1% of assets annually, though the rate declines as the value of the trust assets increases.

As estates or trusts increase in value and complexity, it often is best to appoint multiple people to serve jointly and to consider a combination of professionals and non-professionals.

There are three main areas over which the duties can be divided: administration, asset management and distributions.

For example, you could choose a professional entity to keep the records, prepare tax returns and hold custody of the assets. An investment manager could serve as co-trustee who handles only the investment decisions. A friend, family member or professional advisor could be a third co-trustee who oversees the other trustees, decides how much to distribute and makes any other decisions.

Or the first two sets of duties could be bundled in one professional trustee, and the non-professional could decide on distributions and other matters while overseeing the professional trustee.

When you choose a professional to handle some or all of the duties, be sure to shop around. Qualifications, expertise, expenses and personnel vary widely in the industry. Also consider subjective factors such as whether the individual who is primary contact is likely to mesh well with your family or provide the level of attention you desire. You want the trustee to be a good fit for your trust and loved ones.