You may trust your favorite relative with lots of things: from watering your plants and feeding your pets while you're on vacation, to possibly even serving as guardian of your children in the event of your death.
But experts say managing your trust after you die shouldn't be one of them.
No matter how airtight your estate plan, an individual trustee might not have the skills or knowledge to properly handle the complex duties and responsibilities the title brings—especially as possible tax changes loom, says Dana Yeatman Baldwin, JD, senior trust advisor with Bank of Oklahoma Private Wealth.
"Quite often, individuals think that naming a meaningful person in their life as trustee is an honor—but serving as a personal representative or trustee is a huge undertaking. The more wealth involved, the more of an undertaking it is and the longer the trust settlement process takes," said Baldwin. "It very likely will become a burden to the individual they name."
She recommends an alternative: "You are often better off choosing a corporate trustee who has the experience and knowledge to manage your trust—and, moreover, can remain impartial."
Unlike individual trustees, who may not know what they're getting into, corporate trustees are experienced in performing all that's required of the role. Those duties include collecting and performing an inventory of your estate's assets, maintaining accounting and recordkeeping, communicating often with your heirs and beneficiaries, making distributions to your heirs and beneficiaries, and paying your estate's debts and expenses. All these tasks are implemented within the framework of your estate plan, federal regulation, state laws, and corporate policies and procedures, providing accountability to which the corporate trustee is held. And if your estate has to go through probate, a corporate trustee has the experience to manage the assets during the process.
Conflicted loyalties
Trustees have to maintain their fiduciary duties by remaining impartial toward the beneficiaries and loyal to the trust provisions, as well as making prudent investment management decisions.
That impartiality may be difficult for an individual trustee, if the beneficiaries are the trustee's own family members or friends, Baldwin explained.
For instance, the family-member trustee might need to have difficult conversations with loved ones about excessive distribution requests and spending. In turn, beneficiaries may feel uncomfortable sharing personal financial statements, budgets and tax returns with a relative.
For these reasons, the individual trustee you choose might not fully want the role, as it may not only put them at odds with your beneficiaries, who are possibly family members of the trustee, but even result in causing the individual trustee to be liable for breach of trust, breach of fiduciary duty, or even misappropriation of trust funds charges.
5 tips for ensuring a successful legacy
- Revisit your estate plan every three to five years, even if you haven't had a significant life event.
- Remember that personal relationships change; make sure your estate plan reflects your current wishes regarding beneficiaries, personal representatives, trustees and guardians.
- Don't wait until your family has reached a breaking point to get third-party professional help.
- Use a corporate trustee that has representatives with the skills and knowledge to manage your trust and can remain impartial.
- When choosing a corporate trustee, pay attention to fee structure. A trustee who charges a percentage of assets often amounts to a better deal than one who charges an hourly rate.
Complex responsibilities
Most people don't understand all that is involved with being a Trustee, Baldwin explained. The responsibilities are complex and often time-sensitive. For example, Trustees have to review and file all tax returns and account for all assets and transactions in compliance with Federal regulations and state laws.
This means they also have to keep up with any tax law changes, including those enacted by the Tax Cuts and Jobs Act (TCJA) in 2017, which are set to sunset at the end of 2025. High-net-worth individuals are most likely to be affected by the changes to the estate tax exemption, Baldwin said.
The TCJA more than doubled the estate tax exemption amount for individuals from $5.49 million to $11,400,000, and now more than $12.06 million as adjusted for inflation. If someone doesn't use their full exemption amount before they die, their spouse can use what remains of the deceased spouse's exemption in addition to their own – a process known as "portability," she said.
The $12.06 million exemption will likely not last forever. In 2026, if Congress takes no action beforehand, the exemption amount will return to $5 million adjusted for inflation, which likely will amount to around $6.6 million.
An individual trustee may be surprised by these tax changes—or even unfamiliar with the nuances of estate tax law, such as the portability provision. Corporate trustees stay on top of any proposed and upcoming tax legislation. They can ensure that your estate's tax returns are prepared and filed correctly, and handle any court filings and legal notices.
It's a dangerous mix when a trustee and the beneficiaries all come from the same family, according to experts. In Baldwin's words: "The legacy that you leave to your children, grandchildren and others is meant to be positive. But what individuals forget to recognize is that families tend to fall apart over such inheritances because it's just human nature when money is involved. Having a corporate trustee in place to oversee the implementation of that legacy quite often results far more family harmony."
"I have seen the nicest, most wonderful of families have a falling out when mom or dad dies. I've seen siblings who have been as close as can be their whole lives never speak to each other again," she said. "That to me is a horrible tragedy and not the legacy one wants to leave loved ones."
. © 2024 BOKF, NA.