Who Can Be the Trustee of a Trust in Alabama?
If you’re learning about estate planning in Huntsville, AL, or have been speaking with your Huntsville attorney, you likely have an idea of your options. For example, you’ve probably been told or read that creating a trust isn’t just a good idea but a must if you want to ensure certain assets bypass probate court and certain estate taxes.
While the concept of a trust is easy to grasp, most people don’t understand the gravity and responsibility of choosing someone to be your trustee.
What’s a trustee, you ask? Keep reading to learn everything you need to know about a trustee’s role in a trust and how to choose the right one.
How Do Trusts Work?
When it comes to discussing wills and trusts, you may be wondering whether you need a trust at all. The short answer is yes — any Huntsville attorney will strongly recommend one, especially if you have any significant assets that you want to remain in the family.
It’s all about knowing how trusts work to understand their value in your estate plan. Generally speaking, a trust is a legal document in which you (the trustor, also referred to as the grantor) declare specific assets to pass directly onto an heir (or beneficiary).
There are several different types of trusts to choose from. Here are a few of the most common types:
A testamentary trust. A testamentary trust is specified within your last will and goes into effect once you pass.
A living trust. This is the most popular type of trust, you can choose between an irrevocable or revocable living trust.
An irrevocable trust is finite, meaning that once you create it and sign on the dotted line, the assets within it no longer belong to you. Instead, they’re held under the ownership of your beneficiary until the specified time of their release.
A revocable trust is just the opposite. The assets within a revocable trust remain yours, which means you have total control over them until their release date. Of course, you can also end the trust or change it anytime you wish.
A marital trust. Also referred to as an “A” trust, it is a special type of trust that allows either spouse to become the beneficiary. Typically, when one spouse passes away, the income and assets generated are passed onto the surviving spouse, allowing them to avoid paying estate taxes on said assets during their lifetime.
Charitable trusts. Charitable trusts allow you to designate certain assets to your charity of choice. For example, choose a charitable remainder trust. You’ll still be able to receive income from your assets for a certain amount of time, with any remaining income or assets going to the charity.
While there are plenty of other types of trusts to discuss, what’s more, important is that setting up a trust requires two parties: The trustor (you) and the trustee — which is the person you appoint to manage the assets in your trust, their distribution, and more.
The Importance and Responsibilities of a Trustee
As stated above, a trustee is chosen to act as a custodian for the assets held within the associated trust. Once appointed, this person becomes responsible for the management, administration, and distribution of the assets within the trust as per the trustor’s instructions.
The most crucial role of a trustee is making sure that everyone acts in the trust’s best interest and its named beneficiary — which includes the trustee him or herself. This is why it’s critical to appoint someone you can depend on and trust to carry out your instructions. Conversely, choose the wrong person and end up with someone mismanaging the trust resulting in a loss of assets and leaving your beneficiary with little to nothing.
While the ultimate goal is to carry out your instructions and protect your legacy, a trustee has several other responsibilities. This would include the following:
They must act as fiduciary. A fiduciary is someone who projects the investments and distribution of a trust. In other words, once the trust goes into effect, this person is solely responsible for managing the money or other assets within it, which requires consistent monitoring — almost like a money manager or financial advisor.
They must ensure the safety of the assets and the terms of the trust. Therefore, whoever is appointed as your trustee should know your beneficiaries to some degree and have access to any necessary records involving the assets in the trust to be able to protect them. They should also be able to understand the terms of the trust to ensure that your wishes are followed accordingly.
They must invest the assets when necessary. For example, suppose you dictate that you want your trustee to invest certain assets to preserve or grow them. In that case, your trustee should be able to do so. This means you may have to provide them with steps to do so or set them up with an investment advisor.
They must administer the trust. Then, when the time comes — it could be upon your passing, a certain age, or milestone — your trustee will have to distribute the assets to your beneficiary as per your instructions.
They must make ongoing decisions. For the life of the trust, your trustee will have to make certain decisions. This could include how and when your beneficiaries receive their payment and decide on other provisions. Keep in mind that any provision not instructed in the trust will be left to the trustee’s discretion.
They must keep records and prepare all tax-related forms. In managing the assets in a trust, the trustee must also take care of the tax filing and maintain any financial records and statements associated with said assets.
They must be available to the beneficiaries. In other words, the trustee should be available to communicate with the beneficiary or beneficiaries of the trust should they have any questions or need certain documents.
It should be noted that a trustee’s duties will likely change over time, depending on the type of trust and who the beneficiaries are. For example, suppose minor children are involved. In that case, the trustee will have to manage that trust until the child becomes of legal age and therefore inactive.
Who Can I Legally Appoint as My Trustee?
Believe it or not, it’s common for the person creating the trust to name themselves as the trustee. But, of course, this is only until they can no longer fulfill the role of trustee due to death or mental incapacitation. If this is the case, it’s important to appoint a successor trustee when creating the trust to ensure there is someone who can take over should an unfortunate event occur.
However, in the state of Alabama, you can really appoint anyone you want as your trustee, as long as they’re of legal age. Therefore, it could be your spouse (who can also be named as your co-trustee or successor), one of your adult children, a relative, or a trusted friend. You can even designate your named beneficiary as the trustee, granted they’re fiscally responsible and are up to the task.
Suppose you want your assets to be invested in the future. In that case, you can entrust a corporate bank trust department or a trust company with experience in what you’re looking for. Additionally, suppose you don’t have anyone you can rely on. In that case, you can always appoint your Huntsville attorney as your trustee to ensure that your assets are managed and distributed appropriately.
Keep in mind that you’ll also be expected to pay your trustee reasonable compensation to perform the duties required by the trust. This money typically comes out of the trust assets, which means you should define the compensation amount within the trust document, so there are no misunderstandings.
It should be noted that naming someone as your trustee, successor, or even co-trustee doesn’t mean that you have to give up all control. This person is expected to follow through with your instructions. If you’ve created a living trust, they’ll have to report back to you as long as you’re still alive and mentally sound.
What to Look for in a Trustee
Suffice it to say, not everyone is cut out for the trustee job — no matter how loyal a friend or family member the person may be. In truth, there’s no oversight of a trustee’s actions which means there’s potential to misappropriate the assets and exploit the beneficiaries.
So, keep in mind the following when narrowing down your options:
Can you trust them? Trust is arguably the most essential component of appointing a trustee. You want to make sure the person you choose is someone you can rely on to follow your instructions and protect your assets and beneficiaries in the process.
What’s their relationship with your beneficiaries? You’ll want to go with someone who can make themselves available to your heirs if they have any questions and is someone they feel comfortable reaching out to. You’ll also want to ensure that this person knows your beneficiaries well enough to have their best interests in mind. For example, suppose they know your heirs aren’t very good at managing their finances. In that case, they’ll make sure that they distribute any money accordingly to ensure it doesn’t run out quickly.
Are they financially competent? A lot of different responsibilities come with managing a trust. However, trust management involves a lot of business and financial aspects that will require knowledge and experience. For example, your trustee will need to understand how to keep detailed records, file tax returns, make investment decisions, etc.
Choosing a trustee is especially important if the beneficiary has special needs, as this can be a life-long account to manage. Regardless of the situation, whoever you choose must be someone you can trust, is up to the task, and needs minimal help to ensure that everything is done correctly and according to your instructions.
If you’re in doubt about appointing a trustee or managing a trust on your own, get in touch with us today to set up a consultation. Sarah S. Shepherd or another experienced Huntsville attorney will ensure you’re guided in the right direction with your estate planning here in Alabama.