Choosing the right trustee for an irrevocable trust is perhaps the most important decision you’ll face when setting up the trust. Unfortunately, most people can’t pick the person they trust the most, which is often their spouse.
One of the biggest concerns clients have when transferring assets to an irrevocable trust is losing control. It’s a fear that makes perfect sense. For these trusts to work as intended, you must completely give up control over the assets you place in them. Once transferred, you can’t take them back, which can understandably cause a lot of stress.
Why You Need A Trustee – and Who You Can’t Choose
The whole point of buying and selling life insurance policies through an irrevocable trust is to keep them out of your estate. For the money to be considered outside of your estate, you have to avoid what the IRS calls “incidents of ownership.”
“Incidents of ownership” simply means control. If you have any control over what can be done with those funds, that makes you an owner of the trust for estate tax purposes. Incidents of ownership extend to spousal control, which means that if your spouse is the trustee, the trust is still considered within your marital control.
Having any control at all over that trust, even in the form of a spousal relationship, negates the point of having the trust in the first place. For many of our clients, that’s a problem, as the only person they trust with their money is their spouse.
The person who manages a trust becomes a fiduciary, which simply means they have a responsibility to always act in the best interest of the beneficiaries. This legal responsibility can open them up to liability if the funds are mismanaged. That’s why some people choose to go with a financial advisor or lawyer to manage the trust. In this case, there will be a fee, but that’s permitted in a fiduciary relationship, so long as it’s disclosed.
The Role of a Trustee for Irrevocable Trust
A trustee, by definition, is a fiduciary. This means they are legally obligated to act in the best interest of the trust’s beneficiaries.
Basically, there are two categories of trustees you can consider: fee-based trustees or personal trustees. Personal trustees are usually close family members or friends. If you go with a personal trustee, the person you choose should have a strong understanding of your estate or assets. Many people choose heirs for this position, since that’s who will carry on the business or otherwise manage the money, anyway. However, for larger more complex estates, a financial advisor is typically hired.
Types of Trustees To Consider
- Personal Trustees: If you choose an heir, you don’t need to choose an expert. You just need to look for someone who’ll have at least enough knowledge of your assets and desires to know when to consult an expert. They’ll need to be responsible and have a history of prudent money management. And finally, they need to have the time to dedicate to the task.
- Fee-Based Trustees: Some individuals prefer to hire a professional trustee, such as a financial advisor or an estate management firm. In this case, the trustee will charge a fee, which is considered a reasonable expense of managing the trust. Professionals are less emotionally involved and often have a clearer understanding of complex financial matters. This can be particularly beneficial when managing large estates.
Co-Trustees: A Balance of Responsibility
When you assign a family member or friend as a trustee, you might also want to assign a co-trustee. Some people name a corporation or professional as a co-trustee, which allows for an advisor relationship within the trust. The trustee can ask the co-trustee to make decisions or sign off on certain things when they’re unable, which allows the trust to stay within a family while limiting the responsibility of the main trustee.
Why You Should Consider Paying a Trustee
There are two primary ways to compensate a trustee for an irrevocable trust:
- Hiring a Management Firm to Advise Your Trustee
This method involves hiring a firm to advise the named trustee (often a family member). The management firm helps the trustee make informed decisions and file the necessary paperwork. While the trustee maintains ultimate control, they have access to expert advice, ensuring the trust is administered correctly. - Appointing a Professional Trustee
In this case, a professional—such as an estate lawyer or financial advisor—takes over the role of trustee. The advantage here is that the professional trustee acts as a neutral third party, making unbiased decisions. This is particularly important in large estates, where family dynamics can lead to disputes and estates are tied up for years in probate.
Many families choose professional trustees to avoid conflicts, as professionals are experienced in managing complex trusts and handling difficult situations. This also helps to avoid costly legal battles that can arise when family members disagree over the trust’s administration.
Choosing the Right Trustee for an Irrevocable Trust: Key Considerations
Whether you decide to appoint a family member, friend, or professional as the trustee for your irrevocable trust, the key is careful planning. Here are some steps to help you make the best decision:
- Understand the Complexity of Your Estate
If your estate involves significant assets or complex financial arrangements, a professional trustee may be the best choice. They have the knowledge and expertise to navigate legal requirements and financial intricacies. - Consult with Your Heirs
It’s important to discuss your decision with your heirs. This ensures everyone is aware of their role and reduces the likelihood of disputes later on. - Look for Reputation and Trustworthiness
If you opt for a professional trustee, make sure to research firms with a strong reputation in trust management. A well-regarded firm is more likely to act in your best interest and those of your beneficiaries.
Whether you’re having a family member manage the trust or choosing a professional trustee, the key is planning. Discuss the choice with your heirs to see what they would prefer and start looking at firms with a good reputation in asset management. For more information on choosing the right trustee or financial advisor to advise your trust, contact a Howard Kaye advisor at 800-DIE-RICH.
Conclusion: Making the Right Choice for Your Trust
Selecting the right trustee for an irrevocable trust is one of the most important decisions in estate planning. Whether you choose a family member or a professional, your trustee must be someone you can rely on to manage your assets and uphold your wishes. By understanding the responsibilities of a trustee and the options available, you can ensure that your trust is in the best possible hands.
FAQs
1. What is the main role of a trustee for an irrevocable trust?
A trustee is responsible for managing the trust’s assets and ensuring they are distributed according to the grantor’s wishes, while adhering to the legal and financial obligations of the trust.
2. Can my spouse be the trustee for an irrevocable trust?
No, if your spouse is the trustee, the trust may be considered under your marital control, which defeats the purpose of removing assets from your estate.
3. How do I choose between a family member and a professional trustee?
Consider the complexity of your estate and the trustee’s financial expertise. For large or complex estates, a professional trustee may be more appropriate.
4. Can a trustee receive compensation?
Yes, most state laws allow trustees to receive reasonable compensation for their services, especially if they are managing a complex estate or are a professional trustee.
5. What are co-trustees, and when should I consider them?
Co-trustees involve appointing both a personal and a professional trustee. This setup balances family involvement with professional expertise, especially useful in large estates.
6. What is a fiduciary responsibility?
A fiduciary responsibility means the trustee is legally required to act in the best interest of the trust beneficiaries, ensuring proper management of the trust’s assets.
