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Three Questions to Ask When Choosing a Trustee for Your Trust Fund

Important Considerations That Can Make or Break Your Trust

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Choosing a Bank as a Trust Fund Trustee

In some cases, selecting a financial institution, such as a bank, to serve as trustee for a trust fund can make more sense that putting an individual in the role.

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In the article What Is a Trust Fund?, we talked about the basic components involved in setting up a trust fund to protect assets that you want set aside to benefit someone else, most often a spouse, child, grandchild, close friend, or other family member.  One of the most important people involved in the process is the man, woman, or institution that is named as the trustee.  Even the best structured trust fund can encounter significant difficulties if you don't put careful time and consideration into who should be responsible for protecting the capital you set aside as a legacy.  

Generally speaking, there are three things you should consider when attempting to select a trustee.

1. Is the Person Capable, Qualified, and Willing to Serve as Trustee?

It is amazing how often someone will establish a trust fund and then name a close friend to the role of trustee, without ever stopping to ask if the friend has the necessary experience, and is willing to take on the responsibility and potential legal liability, of overseeing the assets.  Just because you like someone doesn't mean they should be your trustee.  Just because you trust someone doesn't mean they should be your trustee.  Just because someone is brilliant in business doesn't mean they are willing to be your trustee.

If your trust consists of a lot of real estate investments, consider someone who has experience investing in real estate.  If you plan on contributing a minority stake in a local bank, consider appointing an experienced banker.  

The best rule to follow: Be honest in your assessment of a potential trustee's skills, and be considerate of their feelings by asking them beforehand if they would be interested in the task.  

2. Will Naming This Particular Person as Trustee Hurt Family Relationships or Cause Problems Down the Line?

Imagine you have four sons.  The oldest is successful, intelligent, and financially independent.  You have been successful yourself and expect to leave an estate worth $1,000,000.  You want all of the money put into a trust fund for your kids that pays 4% dividends per year.  That would give each of your four sons $250,000 in principal, generating $10,000 in cash distributions annually.  You name your eldest son trustee and give him discretionary power over trust distributions, merely suggesting the payout level you think appropriate, but not requiring it. If one of the other three younger brothers becomes financially irresponsible, or develops a drug problem, they are going to demand money from the eldest brother.  The relationship is going to be strained, probably to the point of hatred.  Even those who are not plagued by poor choices might grow to resent him.  As grown men, they are going to have to ask for cash that was intended for their benefit, giving him power over their lives.  This arrangement sews the seeds of family strife.  It cannot end well in most circumstances due to human nature.

3. Does the Trustee Offer Continuity and Protection Against Malfeasance

What happens if you name a trustee to the trust fund and then he or she dies?  It is for this reason that many individuals and families opt for an institutional trustee, such as a major bank trust department.  That way, there is not only the oversight and services that can be brought by a financial institution, but some relative peace of mind as well.  If the bank-appointed representative dies or is incapacitated, the bank can put another representative in place quickly.  There shouldn't be any lengthy court hearings or potential snags.

As an added bonus, using an institutional trustee can help protect your assets from malfeasance.  A scenario might help you understand the reasons.

Imagine you use a friend as a trustee and he develops a gambling problem, stealing the trust assets.  Sure he's going to go to jail but that doesn't do any good for your beneficiaries.  The cash is still gone.  If, however, you had appointed an institution like Northern Trust, the famous Chicago-based bank that counts roughly 1 out of 4 of America's billionaires as a client, the bank has internal audit procedures and safeguards that would prevent such a theft from occurring.  Moreover, if it did occur, you would have a claim against the bank (and the bank's deep pockets), offering hope of recovery.

One way to get the best of both worlds is to appoint your friend and the bank as co-trustees, who have to work in concert together on major decisions.  That way, you know someone who is looking out for your intensions, but you have the safeguards and watchful eye of a major financial institution to keep him or her honest (and visa versa).  That is my preferred solution in these circumstances.

For more information, I've talked a little bit about trust funds on my personal blog.  This tends to be a specialty area of investing that might not be applicable to most new investors, but is still important to understand.

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