Should You Name Your Children as Trustees?

Trusts can benefit your children and grandchild by protecting your assets from creditors,  divorce proceedings, and even from the financial decisions that your children or grandchildren may make.

That is why trusts are a popular and common tool in Estate Planning. A trust is a flexible instrument that may allow you to pass along assets outside of a probate court proceedings or allow you to have access to your assets during your lifetime while still being able to continually fund the trust.

When setting up a Trust, there are three key roles: Settlor, Trustee, and Beneficiary. The Settlor (sometimes called the Grantor) is the person establishing and funding the trust. The Beneficiary is the person, group of people, or charity receiving assets from the Trust. Lastly, the Trustee is the person who is responsible for administering the trust, watching over the Trust assets, following the terms set by the Settlor, and properly distributing assets to the beneficiary or beneficiaries.

Depending on how you set up your trust (and the goals of your trust), the Trustee can be the same person as the Beneficiary. However, there are often compelling reasons to choose different individuals as Trustees. You may want to select multiple Trustees to work together to administer the Trust. Since most Beneficiaries are the children of the Settlors, clients often ask: Should I just name my children as my Trustees?

The short answer is, well… not always.

Here are a few reasons why you should consider keeping your children as just Beneficiaries, and not as Trustees:

They Might Not Play Well With Others

If you choose just one of your children as the Trustee, they will be thrust into a strange power dynamic with their siblings. If you choose all of your children as equal Trustees, they may have to coordinate and agree on every single decision and transaction involving the Trust. Either one of those scenarios can potentially damage even the best relationships.

Running a Trust can be hard work. Parents often overestimate how capable their children are at handling a Trust, which is different from any other financial decisions. If your children already have interpersonal conflicts or rivalries, those issues will only be compounded when finances and trust administration are added.

Conflicts of Interest

Children have an inherent conflict of interest in controlling the assets that are eventually intended for them. It may be too easy for them to make a decision that is in their own financial interest and not necessarily in the best interest of all the children who are beneficiaries of the Trust. Too often we have seen parents create a Trust to provide for the long-term financial stability of all their children and grandchildren, only to have one child (as Trustee) engage in self-dealing that depletes the assets of the Trust, or disproportionately disadvantages siblings. In addition to hurt feelings and broken familial bonds, transactions like these can lead to expensive lawsuits between family members.

If You Have an Only Child

If you only have one child, they would not have to navigate financial issues with their siblings as a Trustee. There may still be the potential for conflicts of interest. For example, an only child may be receiving support from the Trust during their lifetime, with the remaining assets passing to grandchildren upon the child’s death. However, if the only child is the Trustee, there is a conflict between the child’s interest in receiving support from the Trust and the child’s duty as Trustee to pass the remaining assets along to the grandchildren.

Consider a Third-Party or Professional 

Choosing a trusted third party or a professional as a Trustee may often be a better option. A professional trustee can have an objective point of view about what is financially best and fair for the competing interests in your Trust between Beneficiaries. A disinterested Trustee, meaning someone that does not have a financial interest in the Trust, is likely not tempted by the power to distribute Trust assets to themselves (or the power to withhold them from a disliked sibling). Likewise, choosing a professional trustee brings a level of expertise because they administer trusts for a living and know how to handle common issues that arise. If you want to discuss potential Trustee choices or want a recommendation for a professional trustee, our offices are here to help.

 Where To Begin

Trusts can be a wonderful way to pass along assets to your children. Having the children run that process? Not always so wonderful. For assistance in learning more about the benefit of certain Trusts, establishing a Trust, and deciding an appropriate Trustee, contact Grabitske Law today. We can help!