Selection of a fiduciary: Individual versus Company versus Independent | woodruff sawyer

While the decision to create a trust may be a no-brainer, selecting your trustee requires careful thought. The trustee is the natural or legal person who manages your trust and distributes your assets to the beneficiaries of the trust.

As a trustee, the trustee must follow the instructions outlined in the trust document, manage and distribute the assets of the trust in the best interests of the beneficiaries. The trustee agrees to provide the following services:

  • Obligation to obey the terms of the trust
  • Duty of care and reason in making administrative and investment decisions
  • Duty of objectivity by not giving preference to any beneficiary over another equally suitable beneficiary
  • Transparency obligation to provide information and trust accounts as set out in the trust agreement.

As you can see, this is a significant liability and comes with potential liability.

Should you choose an individual trustee (usually a close friend or family member), an independent agent, or a corporation to take on this responsibility? The answer depends on your personal situation. In this article, we’ll give you some of the pros and cons of each choice.

We’ll also discuss how you can mitigate some of the legal risks that come with the job.

What is an individual trustee?

An individual trustee is usually a trusted friend or family member who generally receives no compensation for their role as a trustee.

The main advantages of appointing a person include a low-cost and simple trust-building process and low management costs. The main disadvantage is that this person may not have the financial expertise or management skills to perform their duties, in addition to a natural conflict of interest if they are also a beneficiary.

Another significant hurdle is when other beneficiaries may question the individual trustee’s impartiality in making decisions. For example, sibling rivalries and family feuds sometimes come to light when a trustee makes investment decisions that include personal and trust assets.

Estate planning and the transfer of assets to a new trustee in the event of the death of an individual trustee can also become an issue.

What is a Corporate Trustee?

The opposite of the individual trustee is the corporate trustee.

A corporate trustee is a registered legal person that is incorporated for the sole purpose of acting as a trustee. Like any other corporation, the corporate trustee has shareholders and directors. In this case, however, the shareholders and directors control the distributions from the trust.

The main advantages of a corporate trustee are:

  • Limited Liability: If legal issues with the trust arise, the corporation is legally liable, not the individual directors who control it.
  • Simplified separation of assets: With a corporate fiduciary, trust assets and personal assets are held under different names, making them easy to tell apart.
  • Asset protection: This clear separation of assets means that an individual’s personal assets are less at risk in the event of a lawsuit.
  • Fluid succession: Unlike the death of an individual trustee, the assets of a trust do not need to be transferred if a trustee dies. The other trustees appoint a successor and the work of the trust continues.
  • Support services: Corporate trustees support evolving structures, including providing administration of directed trusts and back-office services.

The disadvantages of a corporate fiduciary are the costs involved in setting up this legal entity and maintaining its records. Another possible downside is that corporate trustees are likely unfamiliar with the goals, desires, and concerns of trust beneficiaries. Therefore, their decision-making may seem insensitive to some family members.

What is an Independent Trustee?

Instead of working with a family member, close friend, or corporation, a settlor may choose to hire an independent trustee. In legal terms, an “independent trustee” generally means a person who has no beneficial interest in the trust.

An independent trustee is a private, professional trustee who typically has business relationships with lawyers and accountants and has the expertise to manage a trust.

Since this type of trustee operates independently, using them as a trustee helps reduce some of the red tape associated with running a large business. An independent trustee may also have time to familiarize themselves with the needs and concerns of the family.

The costs of using an independent trustee can be lower than those associated with a corporate trustee. However, it is important to keep in mind that an independent trustee may not have some of the services and resources of a corporate trustee that will be hired at the expense of the trust, such as financial advisers, law firms accountants, law firms and real estate services. .

Understanding your options is an important part of estate planning. Choosing a trustee doesn’t have to be an all-or-nothing decision. One option may be to have both an individual trustee and a corporate trustee. In this scenario, the individual trustee could assign duties to the corporate trustee, thereby easing some of the burdens.

What are the risks of being a trustee?

Although following the rules of a trust document may seem easy enough at first, acting as a trustee can be a daunting responsibility. No matter what type of fiduciary you choose, he (and you) should be aware that there is legal risk that comes with fiduciary responsibilities.

Liability claims related to trustee services may include one or more of the following:

  • The trustee has distributed the assets of the trust to the detriment of one or more beneficiaries.
  • The trustee failed to safeguard the assets of the trust.
  • The trustee mismanaged the affairs of the trust.
  • The trustee has made poor investment decisions or given bad advice regarding the assets of the trust.
  • Trustee did not properly account for distributions (accounting for capital and interest)

Since emotions can run high when it comes to inheritances and family relationships, your choice of trustee can mean the difference between whether your assets go where you want them to go or not and keeping the peace. family.

Because of their fiduciary duty, trustees are held to the highest standard of law, fiduciary duty. If they are not protected, they can risk their personal assets while serving the family.

How can your trustee be protected from liability?

Fortunately, there are several ways to protect the trustee:

Indemnification agreement: An indemnity agreementa legal contract that affirms that one party releases another party from any liability in a specific situation – can reassure the trustee. However, in the event of litigation, the assets of the trust may not be immediately available to provide a defense due to certain allegations.

Professional organizations: Some professional organizations allow their employees to act as trustees, including lawyers, accountants and family offices. However, there may be significant discrepancies between extensions granted by the organization’s insurance or large deductibles.

Co-trustees: Having more than one trustee can reduce the risk for a single trustee. However, if you have co-trustees, they are jointly and severally liable even when serving with an institutional trustee, which means that each co-trustee is 100% responsible for the actions they do themselves and the actions committed by the other co-trustees. Also, if a trustee engages a trust company as the trustee’s agent, the trustee retains all liability.

Trustee training: There are educational resources to help your fiduciary learn more about their responsibilities and how to mitigate their risks. Here are three options to consider.

Trustee liability insurance: Trustee liability insurance, a type of errors and omissions (E&O) insurance, is another way to protect your trustees against claims brought by beneficiaries and other entities.

Hiring a trustee

Owners of wealth shed blood, sweat and tears to create their wealth. As part of the process, they hired talented and experienced people to handle complex business situations.

Hiring a trustee requires and deserves the same attention. Every fiduciary, whether independent or institutional, must possess the skills necessary to navigate complex business and personal relationships. Along with the goal of finding the best trustee to carry out your inheritance, you need to find ways to support your trustee in this difficult task. They need protection.

We encourage you to consult your lawyer or financial advisor to find out which options are best suited to the needs of your estate.

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