Trusts are effective financial planning tools based on a structure that is simpler than it may seem. The creator of the trust contributes something of value into the trust and creates instructions as to how it will be managed and eventually disbursed. The trustee is responsible for keeping the property safe and managing and distributing it according to the instructions. The beneficiary is the person or entity that eventually will get the property in the trust.
Trusts may be useful in estate planning, asset protection, and providing for elderly parents or other family members who may be unable to manage their own affairs.
nEstablishing a trust isn’t especially difficult, but it’s not a do-it-yourself project. It’s important to work with an attorney to be sure the trust complies with legal requirements and will actually carry out its intended purpose.
What may be the hardest part of setting up a trust is choosing the trustee. Here are a few suggestions that may help. Some of them come from information provided by the Financial Planning Association.
1. Be sure you as the creator of the trust understand the trustee’s role. Ideally, trustees will have some expertise in legal matters, taxes, and investments. The specific knowledge needed will vary, depending on the scope and purpose of the trust. It’s important to discuss that purpose in detail with any potential trustees to be sure they have the necessary skills and are comfortable taking on the responsibilities.
2. Consider the pros and cons of choosing a personal or a professional trustee. Generally your choice will come from one of three
categories: A personal trustee who is a close friend or family member, a personal trustee who is a professional advisor, or a corporate trustee such as a bank’s trust department.
A family member or close friend may already have inside knowledge of your circumstances, as well as having personal relationships with the beneficiaries of the trust and a personal commitment to carrying out your wishes. The possible downside is that the trustee may have conflicts of interest or find it difficult to enforce some trust provisions.
Professional advisors such as attorneys or accountants will have specialized knowledge that may be important. Even advisors who have worked closely with you will have a level of professional detachment that may make it easier to carry out your wishes, especially any that involve saying “no.”
With a corporate trustee, the relationship is with the firm rather than an individual, which provides continuity and protects the trust even if the original trustee is unable
to continue serving. The downside is the lack of detailed personal knowledge and involvement.
3. Evaluate costs. Professional or corporate trustees will, of course, charge for their services. Friends or family members may not charge fees but really should be compensated appropriately. State laws govern the maximum fees trustees can charge and the specific services provided.
4. A commitment to take on the responsibilities of the trust and to carry out your wishes with integrity may be the most important quality for a trustee. Someone without financial and legal knowledge can always get help from professional advisors.
Finally, remember that the word “trustee” isn’t used by accident or coincidence. The trustee’s role is to act in your stead when you are unable to, managing the assets of the trust with the same care you would use and making the decisions you would make in the best interests of the beneficiary of the trust. The most essential factor in choosing a trustee is finding
someone you can rely on to act on your behalf. Who is, in short, trustworthy.
Visit the California Institute of Finance’s Website to learn more about our MBA In Financial Planning.
Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, a