Should You Serve as a Trustee?

A trust is a common tool of estate planning. It allows a person to provide financially for those people and organizations they want to support, but to do so in ways that provide more structure, oversight, limitations, protection, and direction than would exist through an outright gift or through the tool of a simple will.

A trust is an agreement between a person who owns assets and one or more persons who agree to become the owner of those assets on behalf of the beneficiaries named in the trust agreement. The initial owner is the “settlor” and the resulting owner is the “trustee.” The trust agreement states the terms of the trust—who the trustee is, who the beneficiaries are, and all the rules the settlor establishes governing the trustee in providing the assets to the beneficiaries. Those rules include when and how and under what circumstances the trustee is to provide the assets to the beneficiaries. They also include the amount of discretion the trustee has in doing that, which can range from little discretion to an extensive amount of it.

The terms “trust” and “trustee” reflect the essence of what is happening when a settlor creates a trust and transfers assets to the trustee. The settlor is trusting the trustee to do what the settlor has stated in the trust agreement for providing the assets to the beneficiaries. Trustees often do that work after the settlor has died or is no longer able to make sure their wishes are followed. So the settlor’s selection of the trustee(s) is a very important decision, especially if the trustee is given extensive discretion in providing the assets to the beneficiaries.

It can be quite an honor to be asked to serve as a trustee by a person who is a family member or a good friend. It usually shows that the person places great trust in the trustee. And serving as a trustee is one of the most valuable things a person can do for their family member or friend. But agreeing to serve as a trustee should be done only after careful consideration of the risks and practical problems involved in it, especially if the settlor gives the trustee extensive discretion.

The law imposes “fiduciary duties” on trustees to carry out the settlor’s directions and to appropriately exercise the discretion they have been given. A fiduciary duty is the highest standard of care. When trustees exercise discretion to limit the amount or the timing or the purposes of distributions to certain beneficiaries, the beneficiaries might claim that the trustees have abused the discretion they have been given. So, between the contentious situations trustees can find themselves in and the high standard the law holds them to, serving as a trustee can sometimes be a very challenging task.

In light of those potential problems, settlors often choose professional trustees like banks or trust companies. Their expertise and experience can sometimes prevent disputes, or can put them in a good position to resolve those disputes. But where a settlor wants to use a family member or friend to be their trustee, and asks you to serve as their trustee, recognize the honor behind that request but also think carefully about the risks and practical problems that might come along with accepting that position.

As with many things, it depends. It depends on how the settlor wants to transfer the assets, the character and circumstances of the beneficiaries, your relationship with the settlor, the discretion being given to the trustee(s), how willing you are to make potentially difficult decisions involving the beneficiaries, and how willing you are to risk having to deal with potential disputes.

You might be a great choice for the job. Or not.