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What is a Trustee and Why Should I Trust them?

Trust is a concept of significance in all aspects of life, and it is no coincidence that it lies within the term “trustee.” Without a doubt, being a trustee is no small task, and as French writer, Voltaire, once wisely stated, “With great power comes great responsibility.” Due to the great power and responsibility of being a trustee, two major questions are raised.

  • What is a trustee?
  • Why should I trust my selected trustee?

To address the first question, a trustee is defined by the American Bar Association as “An individual or bank or trust company that holds legal title to property for the benefit of another and acts according to the terms of the trust.” Though the entirety of this definition is important, the word ‘benefit’ sets itself apart. A trustee does not exist for its own benefit, but for the benefit of the third party, which is the beneficiary or beneficiaries in a trust.

Managing your own assets carefully is one thing, but it is even more crucial to be a wise steward of assets that have been entrusted to you.

A 360° Look at Trusts:

 So, what is a trust? Trusts are a form of estate planning that provide structure around the management of the grantor’s assets. The grantor is the creator of the trust, and grantors can select the type of trust. The two main types of trusts are revocable and irrevocable trusts, each with its own pros and cons, as outlined in the Investopedia reference below.

Revocable Trusts

Allow the grantor the power to adjust the trust during their lifetime, provided the grantor is mentally competent.

  • Pros
    • Flexible
      • Assets can be taken out of the trust
    • Provide protection if the grantor becomes incapacitated
    • Establish privacy for assets by providing Probate
  • Cons
    • No immediate tax advantages
    • No creditor protection
    • Can be expensive to establish and administer

Irrevocable Trusts

Are unable to be edited after they are created unless permission is granted from the beneficiary or beneficiaries.

  • Pros
    • Removable taxable assets from one’s estate
    • Can be organized to prevent misuse of assets by beneficiaries
    • Provide stronger protection against legal action upon one’s assets
  • Cons
    • Are more complex to create than recovable trusts and often more expensive
    • Limit the control of grantors after the trust is established
      • Once an asset is placed in an irrevocable trust, it cannot be removed

The pros and cons of each type of trust should be weighed and tailored to the specific situation, as no single trust type is universally applicable. In addition to revocable and irrevocable trusts, there are other types, such as domestic action protection trusts and generation skipping trusts. While the variety of trusts can seem overwhelming, the most suitable trust is ultimately the one that best meets the needs of all parties involved.

Examining Trustee Options

A trustee is selected by the grantor of the trust and can be an individual, a trusted advisor, or an institution. Regardless of whether the trustee is a trusted family member, an institution or a bank, all trustees are bound by a fiduciary responsibility to act in the best interest of the beneficiary or beneficiaries. As a result, selecting a trustee is a decision that must be made with great consideration.

To illustrate, an article by the Harvard Business Review referenced how “The average adult makes 33,000 to 35,000 total decisions each day.” Among these, the choice of a trustee is a particularly vital decision that must be made. Unquestionably, this decision should be made objectively and should be based on the potential trustee’s ability to properly execute the trust. However, there is a caveat, as there is the potential for co-trustees within a trust where both parties have managing power over a trust. Thus, as the quote “too many cooks in the kitchen” implies, it must also be considered how an increased number of trustees could impact the efficiency of decision making.

Whether considering one or multiple trustees, the specific responsibilities of a trustee must be understood. Unlike routine decisions that require little thought, choosing a trustee has significant long-term implications. Therefore, consider the following

qualifications when evaluating a trustee candidate:

  1. Possess a strong understanding of the grantor’s personal and familial affairs
  2. Have a strong grasp on investment and business management, taxes, and administration
  3. Exhibit empathy when engaging with the grantor and their family

A trustee candidate must do more than simply care about the grantor’s well-being; they must also possess the necessary knowledge to fulfill the role effectively. Ideally, the best trustee candidate would be both highly willing and highly qualified.

The Grand Finale

After investing considerable thought into selecting the most willing and qualified trustee, you are still left with the second question posed earlier: Why should I trust my chosen trustee? Beyond the fact that you have carefully made your decision, there are also legal requirements governing a trustee. These requirements encompass the fiduciary duties previously mentioned, which clarify the trustee’s purpose and expectations. The quote below from Cornell Law provides a clear illustration of this responsibility:

“Like other fiduciary relationships, trustees have fiduciary duties of care, loyalty, and good faith. As a result, the trustee must manage the trust in a reasonable manner and avoid self-dealing.”

Trustees are fundamentally responsible for acting in the best interest of the beneficiaries rather than for their own benefit, and should therefore exhibit a high level of trustworthiness. As a result, grantors should have confidence in their trustee’s ability to fulfill the responsibilities that accompany the power of their role.

Even if serving as a trustee is not in your current plans, you likely aspire to demonstrate a similar level of trustworthiness in your own life. After all, you never know if your integrity might one day place you in such a role.

Thank you for taking the time to learn about the role of a trustee and the trust they carry. I gained many new insights during my research, and I hope you found something valuable as well. If you are interested in learning more, be sure to read this article by Richard Littrell titled Oakworth’s Role as a Corporate Trustee.

 

About the Authors:
This article is co-written by Mac Frasier, CFP®, CEPA with Whitney Bean, a 2024 Oakworth Intern. Bean is studying finance at Samford University.

 

More about the Oakworth Interns:

Oakworth’s internship program supports our core purpose: Helping People Succeed. The initiative of our internship program is to provide motivated students a thorough understanding and hands-on experience in the various functions within Oakworth Capital Bank. To learn more from our most recent group of Oakworth Interns click here.