Naming a Trustee: Who Should You Choose?

Most estate planning meetings run about two hours. The trustee decision usually gets made in the last five minutes, when everyone is tired and ready to go home. Someone says “my oldest,” everyone nods, and that is that.

It deserves more than five minutes. The person you name will hold legal title to everything you put in the trust. They will manage it for the people you care about and answer to them, sometimes for decades. If you own a company, that person may also end up deciding whether it keeps running.

The short version

Minnesota’s Trust Code (Minn. Stat. § 501C) gives you nearly total freedom in who you name. An individual, a bank, a trust company, or some combination all work. What the law will not do is fix a bad choice for you. It only fills gaps, such as a default order for replacing a trustee, a resignation process, and grounds for removal. Those defaults are rarely what you would have picked. Name a backup. Ask your candidates first. And if your trust is going to hold an interest in your business, treat the trustee decision as part of your succession plan.

What a Trustee signs up for

Accepting the role of a Trustee is a legal act with legal consequences. Ideally, a person accepts by the method your trust document lays out. If the trust does not say how a trustee accepts or who comes next, a person may accept by taking delivery of trust property, or simply starting to act like a trustee (§ 501C.0701). One detail can cause problems: a person you name who never accepts is treated as having rejected the job 120 days after learning they were named (§ 501C.0701(b)). So if you have never actually asked your brother whether he wants this, you do not have a trustee. You have a name on a page, a clock running, and possibly a trustee you never intended.

Once a trustee has accepted, the duties are not optional. Administer the trust in good faith and according to its terms. Stay loyal to the beneficiaries, not to the trustee’s own interests. Manage the property with the care a reasonably prudent person would use. If there is more than one beneficiary, treat them fairly. Keep records, file returns, communicate.

What to look for

Follow-through, first and foremost. The job includes long stretches of administrative work: account statements, tax filings, beneficiary updates, and more. It requires someone who is organized and, especially, returns phone calls.

A level head, particularly if your trustee is also a beneficiary. That combination is common and usually fine, but it means asking someone to make decisions that cost them money. Some people can do that. Some cannot.

Enough financial sense to know what they do not know. A trustee is free to hire an accountant, an investment manager, or a lawyer. What a trustee cannot do is hire someone and stop paying attention.

And an actual YES. Ask them. In person.

Family member, professional, or both

A family member or close friend knows your people and your reasons, and generally costs less. The tradeoffs are conflicts of interest and a learning curve that adds stress at the worst possible moment.

A bank or trust company brings experience, continuity, and neutrality. That matters most with a blended family, a larger estate, or beneficiaries who do not get along. It costs more. A corporate trustee who has no history with your family might act quite differently than a family member, for good or ill.

Co-trustees can give you both, but here is the part people get wrong: Minnesota’s default rule is that co-trustees who cannot reach a unanimous decision may act by majority (§ 501C.0703). With three trustees, that can work. With two, “majority” means both of them:, every time. Two co-trustees who disagree are not a committee,. They are a stalemate, and the way out of a stalemate is a courtroom.

If you want a pair, build the tiebreaker into the document: a third trustee, a named trust protector, or divided authority so each trustee controls certain decisions.

If your Trust will hold a business interest

This is where the trustee decision combines family questions with business succession planning. Ask what your trustee will have to do the week after you are gone. Vote your membership interest? Sign payroll? Decide whether to finish the jobs on the board or sell the company? Then ask whether the trust document gives them that authority, and whether your operating agreement or buy-sell agreement matches. A trust that says one thing and a buy-sell that says another is a dispute waiting for a trigger.

Two more things business owners should know:

First, many corporate trustees will not hold a closely held operating business. They will hold the proceeds after a sale, but they do not want to run an unfamiliar business. If a bank is your plan, ask before you name one.

Second, Minnesota’s estate tax has a special rule for passing business interests to family. In addition to the $3 million Minnesota exclusion, a qualifying small business can subtract up to $2 million more. But a family member must materially participate in the business for three years after the death. Fail that and Minnesota recaptures the benefit at 16 percent. Naming a third-party trustee, or a trustee who intends to sell the company in year one, could create short-term liquidity problems and long-term tax consequences.

When your first choice falls through

Minnesota fills the gaps, but on its own terms:

• If a trustee cannot serve, there is a default order for filling the vacancy: your named successor first, then someone all the qualified beneficiaries agree on (§ 501C.0704). Naming your own backups keeps that out of a negotiation.

• A trustee can resign with notice to the beneficiaries and co-trustees, or with court approval (§ 501C.0705).

• A court can remove a trustee for a serious breach, persistent conflict among co-trustees, unfitness or poor performance, or in some cases a substantial change in circumstances (§ 501C.0706).

• A trustee is entitled to reasonable compensation unless your trust says otherwise (§ 501C.0708). Talk about that openly, especially with family. Resentment over unpaid work has broken more trusts than bad investments have.

Bottom line

The right trustee is not automatically the person closest to you, and it is not always a person at all. It is whoever can carry out your instructions fairly and competently for as long as the job lasts. If your company is in the trust, it is also whoever can keep it standing while they do it.

Name a backup. Have the conversation before you sign anything. And if the trust will hold an ownership interest, make sure the trust, the operating agreement, and the buy-sell are all reading from the same script.

Want to know more? Contact us.