The point is, all of a sudden, the person who set up the trust retains a certain amount of control that they previously didn’t have when they used to have to give it up. Today, we’re going to talk about why it’s an important decision to figure out who should be the trustee of a family’s trust, or in some circumstances, multiple trusts. Many wealthy families might have a variety of trusts that have been set up through multiple generations, and there might be different trustees. So, they need to really ask themselves who should be the trustee and why.
First, let’s discuss what a trustee is. A trustee is a legal role with a fiduciary responsibility to the beneficiaries of the trust, meaning they have to act in the best interest of the beneficiaries. A common question is, “What if a trustee doesn’t act in the best interest of the beneficiaries?” Well, there are legal responsibilities that the trustee must meet to fulfill their obligations, and if they don’t, a beneficiary can have a claim against the fiduciary or trustee. That word “fiduciary” is something you’ll hear a lot in the financial advisory and trust world.
So, who should a family pick as a trustee? Historically, the trustee has held many responsibilities. They’ve been in charge of managing the assets, which might involve investing the assets, buying new assets, managing a brokerage account, stock portfolio, real estate, or even other businesses. A trust can hold any type of asset, depending on the type of trust. Therefore, you need to be aware of the trustee’s ability to manage those assets. Not everyone is well-suited to run a company or decide which stocks to trade, so this responsibility requires serious knowledge and skills that not many people have.
In addition to managing assets, a trustee is also responsible for making distributions to beneficiaries. Each trust might have different stipulations about when distributions are made to beneficiaries. Furthermore, there are certain administrative duties that come with being a trustee, such as filing tax returns or preparing other tax documents like a K-1 that might show a distribution to a beneficiary. All these tasks make being a trustee a challenging role.
There are many trust companies that can help with these responsibilities, and you might also trust individuals who can serve in this role. But keep in mind that it takes a diverse set of skills to be an effective trustee. Historically, trust companies have built teams of professionals—lawyers, CPAs, financial advisors, and other types of paraprofessionals—to ensure that trusts are administered properly, assets are distributed correctly, and managed well.
In the last 40 years or so, with the advent of modern trust laws, there have been continuous updates to trust laws. However, not all jurisdictions have kept pace, and that’s why I often talk about the variety of jurisdictions when it comes to trust laws—there are differences in all these laws.
One of the modern approaches to trust planning is the advent of directed trusts. Not every state or country offers directed trusts, but these allow the responsibilities of a trust to be carved out—administrative tasks, making distributions, managing assets, and more. Directed trusts essentially bifurcate or trifurcate the responsibilities that a traditional trustee would have. Not every jurisdiction offers these directed trust laws, but that doesn’t mean you can’t implement them in other jurisdictions. What’s important is to ensure there’s a solid legal framework, so you’re not relying on case law decisions made by judges, but on well-defined statutes.
There aren’t many jurisdictions with well-regarded directed trust laws. In the U.S., South Dakota, Nevada, Alaska, Delaware, Wyoming, and Tennessee are known for their strong trust laws, with South Dakota often recognized as having the best directed trust laws. Do you have to go to South Dakota to do this? No, but there are certain circumstances where it makes sense.
Using a directed trust allows you to ensure that the best professionals are in charge of specific roles. For example, if a family has worked with a financial advisor for many years and has accumulated significant wealth, they can continue working with that advisor by naming them in an investment advisor role within the trust. They could also continue working with a long-time CPA by naming them as an administrative trustee, or they could name a trust company to handle administrative functions like compliance and reporting.
The point is, with a directed trust, the person who set up the trust retains a certain amount of control that they previously didn’t have when all trustee responsibilities had to be given to one person or entity. This setup allows them to keep their team in place, ensuring a serious succession plan is in place for many generations, so family wealth continues to grow and the trust accomplishes what it was meant to.
Lastly, though not necessarily part of a directed trust, you can also have a trust protector. I have videos about trust protectors, but in essence, a trust protector ensures the integrity of the trust and its objectives. They act as a sort of super trustee, overseeing all other responsibilities and providing a checks-and-balances system within the trust. This ensures that no one person is doing everything, and it really is a team effort to ensure the client’s objectives are met over many generations, with the family continuing to benefit from this wealth over time.