Selecting a Trustee: 7 Truthful Tips When Choosing a Trustee.
How to select a trustee. Selecting a trustee can be complicated. Learn 12 factors to consider when choosing a trustee.
When selecting a Trustee the most important qualities are honesty, stability, dependability, organization, financial experience, and ability to devote time and energy on an impartial basis for the benefit of all Beneficiaries. The Trustee is the most pivotal and critical part of any Trust Agreement.
Selecting a trustee is very important. So choose wisely. Read on to learn the aspects that constitute a trust and how selecting a trustee should be decided upon by you.
The Concept of a Trust Agreement
A Trust is a written contract between the Grantor and the Trustee for the benefit of all Beneficiaries which can include the Grantor and anyone else he chooses including spouse, children, grandchildren, friends, or charities.
A Trust can be created during one’s life or by will upon death. A trust that is created at death by virtue of a will, is referred to as a Testamentary Trust by the “Testator” (the dead guy). A trust created during the life of an individual is referred to as, the “Settlor,” the “Grantor,” or “Trustor.” The Trust instrument is referred to as “inter vivos” formed during the life of its creator.
Once a Trust is created, the Trust becomes the new legal titleholder of assets either transferred to the Trust, as a gift or as a sale. In order to avoid fraudulent conveyance, the individual giving up his legal right to possession or title and the right to own must in return receive equal fair cash value at the time of the transfer. Otherwise, it’s a “fraudulent transfer” to the detriment of all potential creditors or it’s a gift subject to a gift tax.
The Gift Tax on Taxable Gifts
The gift tax applies to the fair cash value given up at the time of the transfer (not the amount that was originally paid). Taxable gifts are reported on IRS form 709, taxable to the person giving up the right of possession by gifting his assets. The person receiving the gift (in this case the Trust) always receives the gift Tax Free. (Note: the person receiving the gift always obtains it tax-free and the person giving the gift is always taxed on it unless it’s less than $12,000 per person beginning in 2006).
Trustee’s Power Derived from Grantor
A Trust can be revocable or irrevocable, grantor or non-grantor. Revocable is when the “Grantor” retains a power to “void” the Trust Contract. Irrevocable is when the Grantor “severs” all power of possession, the legal title to own the Trust. The concept of “possession” is the legal right to own and vested exclusively to the TRUSTEE. The Trustee’s power is derived from the Grantor(s) by a written agreement (Trust Agreement). The most important person is therefore the Trustee.
Consequences When Grantor Names Himself Trustee
If there is a provision in the Trust Agreement for the Grantor to name himself as the Trustee for his list of Beneficiaries, which includes himself, then he runs the risk of frivolous liability and harsh tax consequences since he has elected himself the Pope by blessing himself and kissing his own ring.
Factors to Consider When Choosing a Trustee:
- Location of the assets. Real estate, for example, has a definite location and the Trustee more familiar with the financial and tax implications of the property should be given weight.
- The individual Trustee’s physical location (home address) in relation to the Beneficiaries.
- The types of assets. Tangible or intangible, cash or near cash.
- Relationship of the individual Trustee to the Grantor’s family.
- An understanding of the intra-family dynamics of all the Beneficiaries.
- Familiarity with the financial management of himself and others he may employ.
- The financial ability and level of experience with the assets entrusted.
- If it’s a family business, the nature and familiarity of the business.
- The willingness and vitality to serve as an impartial fiduciary.
- The legal capacity to interpret and administer the agreement fairly to all Beneficiaries.
- The willingness to accept the appointment and the willingness to accept potential legal liability from disgruntled beneficiaries.
- Succession planning for a successor Trustee.
Some Bad Trustees
Selecting a Trustee is Complicated