Although a Last Will and Testament remains the most common estate planning document, even a relatively simple estate plan will typically require additional tools and strategies to accomplish all the goals of the plan. A trust is among the most popular of these additional tools, due in large part to the flexible nature of a trust and the numerous estate planning goals that can be furthered through the use of a trust agreement. If you decide to include a trust in your estate plan, you will need to appoint a Trustee to administer the trust. If you are married, your initial instinct may be to appoint your spouse as the Trustee; however, often a spouse isn’t the best choice. The following is a brief explanation of why you may not want your spouse to be your Trustee.
Trust Basics for the Beginner
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. A trust is created using a trust agreement. The trust agreement includes terms, created by the Settlor, that dictate how the trust is to be administered. A Settlor may include almost any terms he/she wishes and the Trustee must abide by those terms unless a term is illegal or unconscionable. All trusts fall into one of two broad categories – testamentary or living trusts. A testamentary trust does not activate until after the death of the Settlor, usually through a provision in the Settlor’s Will. A living trust, on the other hand, will activate during the Settlor’s lifetime once all elements of creation are in place. A living trust can be further divided into revocable and irrevocable living trusts whereas a testamentary trust is always revocable.
The Trustee of a trust is responsible for administering the trust according to the terms created by the Settlor. Some of the many duties and responsibilities of a Trustee include:
- Managing and protecting trust assets
- Abiding by the trust terms unless they are impossible, illegal, or unconscionable
- Investing trust funds using the “Prudent Investor Standard”
- Monitoring trust investments
- Communicating with trust beneficiaries
- Resolving conflicts among beneficiaries
- Making discretionary decisions
- Distributing trust funds to beneficiaries
- Approving or denying distributions if given discretionary authority
- Keeping detailed trust records
- Preparing and paying trust taxes
Why Your Spouse Might Not Make the Best Trustee
One of the most common mistakes people make when creating a trust is failing to spend the time necessary to choose the best person to appoint as Trustee. Instead, they simply appoint a spouse, close friend, or family member based solely on the fact that they “trust” that individual. While it certainly is important to trust your Trustee, there are several reasons why a spouse might not be the best choice for your Trustee, including:
- Lack of legal and/or financial knowledge and experience – administering a trust requires at least a basic understanding of the legal and financial concepts involved in trust administration. Unless your spouse is a lawyer or financial advisor, your trust is likely to suffer because of your spouse’s lack of knowledge and experience.
- Loss of objectivity – one of the most common reasons to create a trust is to avoid probate. Assets held in a trust bypass the probate process altogether, making it an excellent way to ensure that your estate assets are available for use by the intended beneficiaries shortly after your death. A trust also offers a way to protect a minor child’s inheritance because that child cannot inherit directly from a parent’s estate. If either (or both) of these motives for creating a trust apply to the trust you create, it means that you will likely create a testamentary trust. Consequently, that trust will not activate until your death. Expecting your spouse to be able to focus, let alone remain objective, during the administration of the trust immediately following your death is somewhat unrealistic.
- Increased risk of conflict of interest – in many trusts, the beneficiaries are family members of the Settlor. As such, there is a good chance that your spouse and/or your children will be beneficiaries in the trust you create. As you may well imagine, discretionary decisions may be harder for your spouse to make under these circumstances and, therefore, may create a conflict of interest.
Before you make the mistake of appointing the wrong person to be the Trustee of your trust, consult with a trust administration attorney.
Contact Trust Administration Attorneys
For additional information, please join us for an upcoming FREE seminar. If you have questions or concerns regarding who to appoint as your Trustee, contact the experienced attorneys at Nash, Nash, Bean & Ford, LLP by calling 309-944-2188 to schedule your appointment today.