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Four Questions to Ask When Choosing a Trustee for Your Trust Fund

Chris Gottschalk

Chris Gottschalk About The Author

May 9, 2019 3:46:00 AM

In previous blog posts, we’ve talked about why a trust fund can help you even if you’re not rich. We’ve also talked about how to set up a trust fund. However, there’s one part of a trust we haven’t talked about. If you want your trust fund to succeed, you’ll need to pick a good trustee. If you don’t, your fund may hurt your beneficiaries more than it helps.

Fortunately, you don’t need to select a financial genius or a legal wizard to make sure your trust fund runs effectively. You just need to ask four questions to make sure you’re getting a suitable trustee for your trust fund. 

Questions to Ask When Choosing a Trustee for Your Trust Fund

Is this Person Qualified, Capable and Willing to Serve as the Trust Fund’s Trustee?

This might seem like an obvious first step, but you’d be surprised how many people name a close friend or family member as the trustee without asking whether or not the person is qualified. Make sure that the potential trustee has the qualifications to be a trustee, first.

When you first start your search for a trustee, make sure your candidates will be able to:

  • Stay in regular contact with the trust beneficiaries
  • Be able to manage the assets in the trust
  • Be able to identify and protect the trust assets
  • Understand what the conditions of the trust require them to do
  • End the trust when conditions in the trust document are met
  • Be completely honest

You should also take care to make sure your potential trustee actually has experience managing the assets in the trust. In other words, if your trust fund’s assets are all real estate holdings, you’ll want to make sure the trustee actually has experience managing real estate instead of, say, stock options or oil rights.

You’ll also want to make sure your potential trustee is willing to take on the role. If you sign them on as trustee without getting their approval beforehand, you won’t get a trustee who looks after the trust fund like they need to.

Keep in mind that the trustee doesn’t have to be good at every aspect of managing the trust. Pick a trustee who knows how to research and isn’t afraid to ask for help when they need it.

 Read More: Planning For Your Future with an IRA

Will your Potential Trustee Cause Problems in your Family? 

Even if your trustee pick is capable and willing, you’ll want to make sure that picking them won’t hurt relationships in your family. Unfortunately, money and greed have wrecked millions of relationships throughout history, and your family is likely no more immune than any other.

Remember that the trustee gets some power over the beneficiaries’ lives, and that can strain any relationship. The trustee might start to resent the beneficiaries from being greedy, and the beneficiaries might resent the trustee for withholding funds. Either way, this can tear apart a family. 

Will the Potential Trustee Outlive You?

Even after you’ve considered your potential trustee’s qualifications and relationships to you, there’s another matter to consider—will your trustee pick be around after you’re gone? This is important. A trustee has to be available when needed to administer the trust, and if they’re not around then no one can touch the trust fund’s assets until either the trustee becomes available or another trustee is named.

While you’ll want to make sure your pick for trustee is young and healthy, you’ll also want to make sure your trust has some clear provisions for selecting another trustee. This is especially true if you want the trust to last for generations. Otherwise, your beneficiaries will have to get a court order to get a new trustee. 

Questions to Ask When Choosing a Trustee for Your Trust Fund

Does Your Potential Trustee Offer Protection From Malfeasance?

One reason your pick for trustee needs to be completely honest is because a trustee is the person who has the most access to the trust fund’s assets. This means they not only have the most opportunities to use the trust fund assets for themselves instead of the beneficiary, but they’re also in the best position to keep the beneficiaries from finding out until it’s too late to save anything.

At a minimum, your trust document should have limits on what the trustee can and cannot do with the fund’s assets. You may also want to look into appointing an institution, like a credit union or bank, as a trustee. Institutions have an advantage over individual trustees in that they are far more likely to be around after you’re gone, and a good financial institution will also have some internal audit procedures and safeguards to prevent an individual in the institution from stealing any assets out of the trust fund. However, a financial institution will definitely charge a management fee, and it may be higher than the fee an individual trustee would charge.

One potential solution is to appoint an individual and a financial institution as co-trustees. While this might saddle you with a higher management fee, it gives you the benefits of both types of trustee. An individual trustee can give your trust fund the one-on-one attention it deserves, but you also have the institution’s safeguards and oversight keeping the individual trustee honest. 

Questions to Ask When Choosing a Trustee for Your Trust Fund

The Right Partner Can Make a Difference

Selecting the right trustee is critical for the success of your trust fund. You want to make sure you select a good partner who you know is looking out for you.

One good financial partner is the First Alliance Credit Union. Contact our Member Services expert team of advisors to discover more ways to save, invest and even donate your money. They will be happy to discuss the investment options at your disposal and help you select the ones that are right for you.

Trust Funds | First Alliance Credit Union 

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