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Relative or professional trustee: What are the pros and cons?

When setting up a trust – whether a special-needs trust for a child or a testamentary trust – deciding on the right trustee is crucial. When your will leaves money or property to a trust, your estate personal representative will transfer those assets. But then, his or her role is complete.

A trustee’s duties may continue for many years and sometimes for generations. We covered some of the management and distribution duties in our February 2017 post. In this post, we share pros and cons to consider when selecting a trustee.

Family members or other relatives

One major reason that most people name a son, daughter, niece or nephew is cost. Relatives usually agree to volunteer for the role. For small- to medium- sized trusts, this can make sense when you have a relative with financial acumen and little concern about potential family conflict.

When naming a relative as a trustee, name a successor or multiple successors to take over in case of a death or incapacity.

If a potential trustee worries about taking on the role, another option is to hire an institutional co-trustee. A bank or investment company often charges a smaller fee for investment advice in the capacity of a co-trustee.

The negatives for appointing a relative as a trustee are lack of expertise investing money. This could lead to losses if the person tries to beat index funds by day trading or moves all assets into one investment like gold. Family conflict is another risk. A brother with a frugal nature may deny requests made by a sibling as wants, not needs. It could strain relationships and even lead to litigation.

Banks and trust companies

These institutional investors are good at what they do and have procedures in place for managing trusts in an objective manner. This can be helpful when there are several beneficiaries and worries about potential family conflict. They also will be around for the long term.

A disadvantage is their cost; request a schedule of fees before deciding on a trustee. These fees are generally deductible against income for tax purposes. These institutions are also not great at the interpersonal – beneficiaries may not find a sympathetic ear when discussing questions or needs.

Before ever appointing a relative as a trustee, have a candid conversation to ensure that he or she understands the role and agrees to accept the responsibility. When you have any concern about family relationships, work with an experienced estate planning attorney to develop a workable plan. It may be a last gift to loved ones.

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