A trust is an excellent way to bestow wealth, but disbursing money to your beneficiaries hinges on a crucial party: the trustee. Your trustee’s financial knowledge, discretion and accountability will influence how a trust impacts beneficiaries. These duties can be overwhelming for one person to manage, especially if they’re a family member. Fortunately, a trust can have an institutional trustee, such as a bank, that oversees the acts of a trustee on your trust.
For help with creating and managing a trust, consider working with a financial advisor.
What Is a Trustee?
A trustee is an entity that manages wealth, assets or property on behalf of the owner of the estate. The owner, also called the trustor, appoints a trustee to act in the trustor’s best interests. A trustee usually has fiduciary status, meaning the law requires them to administer the trust to the benefit of those named in the trust.
Responsibilities of a Trustee
Managing a trust or estate is a multifaceted task. As a result, trustees have the following responsibilities:
Trustees must log the trust’s activity, including withdrawals, expenses and income. In addition, they must ensure the activity follows the trust’s dictates. For example, beneficiaries might only have access to the trust’s income and not the principal.
In addition, the trustee administers the assets according to state laws, which differ across the country. As a result, the trustee will likely have to be well-versed in trust regulations for multiple states.
Trustees also manage the filing of the trust’s tax returns. Specifically, the tax returns should be on time and owed taxes paid promptly. Remember, the IRS can audit a trust, so it’s up to the trustee to ensure the trust complies with tax laws.
Disbursements to Beneficiaries
Trustees field monetary requests from beneficiaries, meaning they decide how much money beneficiaries receive and when. These decisions involve weighing the needs of the present against future circumstances. Because trustees have the authority to withhold money from beneficiaries, their sense of fairness and practicality is crucial.
For example, say a trust has two sisters as beneficiaries. The older sister wants the trustee to sell some stock within the trust to fund her ambition to fund her startup. Meanwhile, the younger sister recently had a child and wants to ensure the trust will fund their education in the future. The trustee must make decisions in challenging situations, taking account of the trustor’s original wishes and the dynamics of the beneficiaries’ lives.
Trustees must make investment decisions in light of beneficiaries’ needs and lifespans. Therefore, trustees allocate investments based on when beneficiaries will withdraw money in the future, the amounts they request and retaining as much of the principal as possible to create future investments. Plus, trustees usually diversify investment portfolios to reduce risk.
Why it’s Important to Name the Right Trustee
Naming the right trustee is vital for the following reasons:
- It requires in-depth knowledge of investing, personal finance and law.
- The trustee will manage your assets in your place. As a result, you should trust your trustee’s decision-making as much as your own.
- Your beneficiaries will rely on your trustee to grow the trust’s investments and disburse funds fairly.
Benefits of Naming a Bank as a Trustee
Naming a bank as a trustee brings numerous advantages for trustors and beneficiaries:
Attention and Expertise
Although naming a family member as a trustee might seem convenient, they might not have the time or skills to manage the trust adequately. On the other hand, banks focus on investing strategies, tax management and accounting, which is what a trust needs in large, steady quantities to run well. While banks charge for their professional services, finding an able and willing trustee who will work for free is rare.
Trusts hold wealth for current and future generations. As a result, it’s advantageous to have a trustee that can serve them all. While a family member as a trustee will have a limited lifespan, a bank will carry on into the future as an institution. For example, if the trust were to last seventy-five years, the bank would have meticulous records from its past employees regarding the trust. If one of the trust managers at the bank passes away, the organization has the resources, personnel and familiarity with the trust to continue managing it effectively.
Even if you have a close-knit family, emotions can cloud the judgment of the family member acting as the trustee. In addition, navigating the competing desires among family while remaining neutral is challenging. A bank will act in the beneficiaries’ best interests without giving undue priority to emotional strain or differing opinions in the family.
Furthermore, naming a bank as a trustee can prevent uncomfortable family dynamics regarding the trust. For example, if your father and the bank are co-trustees, you won’t have to ask your father for money from the trust. Instead, requests can go to the bank, which will make an objective decision that won’t hurt family relationships.
A bank is subject to industry laws and has the money to repay a family in the case of misconduct regarding your trust. On the other hand, an individual trustee can obscure their activity and even steal from the trust. If they don’t have the money to repay the family, it might be impossible to make the trust whole again.
Drawbacks of Naming a Bank as a Trustee
Naming a bank as a trustee can bring about several pitfalls. For example, you might have difficulty getting in touch with a professional at the bank who can answer questions about the trust. In addition, the bank might have a minimum wealth requirement for the trusts they manage, meaning your trust might not be eligible if it’s not worth enough.
Lastly, and most prominently, naming a bank as a trustee places control of the trust outside your family. The bank might invest or distribute money in ways the beneficiaries don’t like. However, the trust can counteract this possibility by containing a clause stating the beneficiaries can name a new trustee if they find the present one unsatisfactory.
Should You Name a Bank as Trustee of Your Trust?
As with any momentous financial decision, it’s vital to weigh your circumstances and needs. Naming a bank as trustee might be right for you if the following conditions apply:
- You find a bank that communicates its services and trustee fees
- Your current trustee lacks the skills to administer the trust.
- Your family needs an objective voice about distributions and investments.
- You’re concerned about the welfare of future beneficiaries.
- You have consulted an attorney about the trust.
On the other hand, naming a bank as a trustee might not fit your situation. For example, you and your sibling might be the beneficiaries of the estate your parents left. Your sibling is the trustee. The trust’s investments are performing well, and your sibling pays annually for a professional to file taxes for the trust. There is no friction between you and your sibling, and you both take equal distributions every year. In that case, naming a bank as a trustee is unnecessary.
The Bottom Line
Naming a bank as a trustee can benefit trustees by eliminating emotional decisions, providing financial expertise and delivering excellent service over the trust’s lifespan. However, understanding the bank’s fees is crucial, and it’s helpful if the beneficiaries have the right to name a new trustee in case the bank does a poor job. That said, a bank as trustee can take the stress off of family members acting as trustees and provide needed objectivity for the trust’s financial functions.
Tips for Naming a Bank as Trustee
- A financial advisor can help with any issues around trusts. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Trusts aren’t a one-size-fits-all solution to passing on wealth to beneficiaries. Your circumstances are unique, and your trust should reflect this. Use this guide to different types of trusts to understand which suits you best.
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