Risks of Using a Private Individual as Trustee for Children

Marc Carlson |

The selection of a trustee to manage and periodically distribute both income and principal held in a “Descendant’s Trust” (“Dynasty Trust”), is an important matter.

The typical parent’s first reaction is to select the brother or sister of the child (“sibling trustee”). The client feels this is the most natural choice because the client believes the following reasons are “sensible”:

  1. The sibling trustee will take greater pains to oversee the child’s financial needs.  “Blood,” after all, watches out for blood.
  1. Only the sibling trustee would assume the periodic burden of helping out the child.
  1. The sibling trustee is already familiar with the child’s needs.
  1. The sibling trustee can tune in better to the client’s thinking as to how the child should be treated.

Anytime you think about choosing a private individual, such as a family member, as your adult or minor child’s trustee, there are several things to consider:

  1. Your child’s trustee does not come into play until both you and your spouse are dead.  By that time, the trustee may be elderly, disabled, incompetent or deceased.
  1. There will be stress on—and potentially the destruction of—the sibling relationship because when one sibling holds money for another, the tie that binds is no longer only blood—it is blood and money.  When the two are mixed, the sibling relationship becomes adversarial: “You have my money, and I want it!”  Whether the private individual trustee is your child’s brother, sister, uncle, aunt, nephew, niece, cousin, or close friend, the money relationship ultimately may destroy the family connection.
  1. Your designated trustee has his or her own life. He or she simply may not have the time to handle the periodic details of the trust estate.
  1. Your designated trustee may (and probably will) charge as much for his or her services as a bank trustee would charge, and the individual probably wouldn’t do as good a job as a bank trustee.
  1. Your designated trustee may not be skilled in investments and may not have the necessary tools to deal with the daily details of managing trust assets.
  1. Your designated trustee has his or her own life. He or she simply may not have the time to handle the periodic details of the trust estate.
  1. Your designated trustee may not be equipped to fulfill the administrative and investment duties necessary to make the protective trust for your child efficient and productive.
  1. You may not want to inflict the periodic burden of managing trust assets on whomever you have selected as trustee.  Often, your child may make unreasonable demands on the trustee and hound the trustee to the point of frustration and distraction.
  1. There is no “policeman” looking over the trustee’s shoulder.  When your choice becomes the trustee, the trustee has unfettered control over all assets and accounts that are in the trust, such as your real estate, bank accounts, money, stocks, and all other assets held by the trust. If he or she dissipates the trust assets, the money is gone forever. There may be little recourse for your child because, as a practical matter, a lawsuit against a trustee often turns out to be frustrating and expensive with no beneficial result.
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