Who should oversee your estate when you're gone? It's tricky

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We all know you can’t take it with you, but the next best thing is making sure your hard-earned estate is spent the way you want. Through a discretionary trust, you can do just that.

But how do you choose the best trustee to ensure that your wishes are carried out after your death?

A testamentary trust is created through a will. It may be fixed, stipulating that the beneficiaries will receive a certain amount of money on certain dates or upon certain life events, such as a marriage. In other cases, the terms may be loose, and the trustee can have almost complete discretion over how much money to parcel out to each beneficiary, and when.

A discretionary trust of this type offers peace of mind when the beneficiaries may not be capable of managing the estate – in the case of a minor, for example, or someone with a disability, drug or alcohol dependency, or poor money-management skills. It is also a prudent way to support beneficiaries through unpredictable future life changes.

Regarding trustees, the first question is whether the position should go to a single individual, a team or a corporate entity such as a bank or private trust company. “More often than not, you do see individuals play the role of trustees,” says George Angelopoulos, vice-president, tax, at Richter LLP in Montreal.

“The reflex is to choose a family member or friend, but trustees have a lot of responsibility,” he says. “In particular, they have to manage the trust to the benefit of all beneficiaries. They have to have the objective capacity to play that role, but also know the family.”

Corporate trustees are an option

With multiple trustees, each might bring qualities to the table that others lack. Also, three is the magic number, because two may run into a voting deadlock.

“I would usually recommend that the third trustee be an arm’s-length person [rather than a family member],” says Peter Weissman, a partner with Cadesky Tax in Toronto and chair of the public policy committee of the Society of Trust and Estate Practitioners (STEP) Canada. “The trustee becomes aware of people’s personal financial situations, so it usually is a friend of the family.”

The reflex is to choose a family member or friend, but trustees have a lot of responsibility.

George Angelopoulos, Richter LLP

Corporate trustees, on the other hand, are being seen as more of an option than they used to be, Weissman says. “This is because in many cases you want the decisions being made to be independent.” A corporate trustee frees beneficiary-trustees from potentially divisive conflicts and protects all the beneficiaries from bad actors.

Another consideration is the expected time period of the trust, says Melanie McDonald, vice-president and regional director (Western Canada) with BMO Trust Company in Calgary. If the trust is intended to support someone for life, “you need to think of the age of the trustees,” she says, adding that “you can appoint successor trustees, but a corporate trustee is better for a longer trust.”

You should share the same values

McDonald warns that individual trustees can be sued by the beneficiaries if they are perceived to have acted unfairly, and “they can be liable for taxes or debts if they give out the money before paying the taxes or debts.”

A trustee need not have a background in law or finance, but “you ideally want the person to know the family and the founder,” says Weissman. “You’d like to know that, although they may differ in opinion, they at least start with the same values.”

How much discretion should a trustee have?

More is often better, says Angelopoulos: “It’s not always easy to amend trust deeds. Typically, we provide for absolute and full discretion for the trustees.”

McDonald points out that guidance can be provided to trustees in the form of a “letter of wishes.” While it is not legally binding, it offers trustees direction as to the testator’s goals and principles. It might typically describe desired outcomes in plain language rather than legal terminology, such as “maintaining a beneficiary’s standard of living” or “making sufficient funds available for a beneficiary’s health, maintenance, welfare and support.”

While the letter of wishes may set some specified limits, such as a maximum amount to be spent on a new home or wedding, McDonald says, “if you have a good trustee who will follow your wishes, broad discretion is good.”

Replacement of a trustee

Weissman notes that most trusts these days have a clause that allows the trustees – usually a majority of the trustees – to change the trust. “This is not necessarily a blanket ‘change anything you want’; there are tax implications to some types of changes,” he says. “Adding a beneficiary could change the disposition to the other beneficiaries, which would have tax implications.”

What happens when a trustee needs to step down, whether because of age or infirmity, or because they are moving to a different country, among other possibilities? “There are powers that you can put into a trust agreement that will allow someone to replace trustees and appoint new ones. It’s usually a majority of the trustees, but there’s a lot of flexibility,” Weissman says.

He adds that it’s wise to establish a different decision-making method for choosing new trustees than for deciding how to distribute the assets: “In many cases, someone who’s not a trustee, a ‘protector,’ may have the ability to make decisions about the trustees.”

A protector, who might be a family friend, may also have the power to remove a trustee who is “making unreasonable decisions or not acting in great faith,” he says. (Generally, if there are several trustees, a majority can oust the offender.)

“People spend a lot of time thinking of how to distribute their money, but often not enough time is spent thinking of who’s the best trustee for your trust,” says McDonald. “Who would make a good trustee?

“Someone who understands your values, who is responsible and responsive, who has time to do the job, who is trustworthy” and, not least, someone with “the knowledge and expertise to manage the trust assets, which could be complex.”

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