Including a trust in a carefully designed estate plan is a common strategy for protecting wealth and providing for loved ones. When drafting the trust agreement, one of the most important choices you will make involves determining the level of authority, or discretion, that your Trustee will hold. Because the Trustee is responsible for carrying out your instructions and managing trust property, the extent of that authority can greatly influence how effective the trust will be in meeting your objectives. If you are contemplating the addition of a trust to your estate plan, the Los Angeles attorneys at Schomer Law Group, APC help you decide how much authority your Trustee should have.
Understanding the Nature of a Trust and a Trustee’s Role
A trust is a legal relationship created when the Grantor, also known as the Settlor or Trustor, transfers property into the care of a Trustee. The Trustee then manages and distributes those assets for the benefit of the individuals or organizations named as Beneficiaries. People often use trusts to avoid the time and expense of probate, to control when and how assets are distributed, or to protect heirs from creditors and poor financial decisions.
The Trustee is appointed by the Grantor and can be a trusted family member, a close friend, or a professional such as a bank, attorney, or trust company. Regardless of who is chosen, the Trustee must fulfill fiduciary duties that include investing assets prudently, paying taxes, keeping records, making distributions, and ensuring the trust operates according to the terms outlined in the trust instrument. The Grantor decides how much flexibility to grant the Trustee, which can range from very limited authority to almost complete discretion.
Why Trustee Authority Is Important
The amount of authority given to a Trustee determines how adaptable the trust will be in meeting future circumstances. A trust with very specific instructions offers certainty and predictability, while a trust with broader discretion gives the Trustee the ability to make decisions in response to changes in the Beneficiaries’ lives or in the economy. Striking the right balance is essential. Too much control can leave Beneficiaries without adequate safeguards, while too little flexibility can prevent the Trustee from making decisions that would protect the trust’s long-term value. Common factors to take into account when deciding how much authority your Trustee should have include:
- Purpose and Goals of the Trust: Your reasons for creating the trust should drive your decision. A trust established primarily to pay for a child’s education or a family member’s medical needs may call for very specific instructions, leaving the Trustee little room to make discretionary choices. By contrast, a discretionary trust designed to protect wealth for future generations may give the Trustee more freedom to decide when and how to distribute assets. For instance, you may want your Trustee to consider a Beneficiary’s financial health, employment situation, or spending habits before making a distribution.
- Needs and Circumstances of Beneficiaries: The characteristics of the Beneficiaries are equally important. If a Beneficiary is financially mature and demonstrates responsible money management, you may feel comfortable authorizing the Trustee to use broader judgment. On the other hand, if a Beneficiary is young, has special needs, struggles with addiction, or has difficulty managing finances, then the trust agreement may need to restrict the Trustee’s authority to ensure the assets are safeguarded. Trusts that limit access to funds or that impose conditions can provide protection while still supporting the Beneficiary’s essential needs.
- Trustee’s Skills and Experience: The level of discretion you grant should align with the Trustee’s capabilities. Professional Trustees, such as corporate trust departments or law firms, are often equipped with the financial expertise, resources, and impartiality necessary to manage complicated trusts. In these cases, broader discretion can be beneficial, allowing the Trustee to respond to changing tax laws, fluctuating markets, or unexpected family circumstances.
When a family member or friend serves as Trustee, the situation is different. While they may know your wishes and family dynamics well, they might lack the financial background needed to manage complex investments or make difficult judgment calls. Too much discretion given to an inexperienced Trustee can lead to unintentional mistakes, disputes among Beneficiaries, or even litigation. In such cases, it may be best to provide more specific instructions in the trust agreement, or to appoint a co-Trustee to share responsibilities.
Balancing Flexibility and Oversight
In many estate plans, the best approach is a balance. Granting some discretionary power allows the Trustee to deal with unforeseen events, such as a Beneficiary experiencing a medical crisis or facing job loss, while also including clear guidance to ensure the Trustee cannot act outside the Grantor’s overall intentions. For example, you might authorize distributions for “health, education, maintenance, and support” but require Trustee approval for luxury purchases or risky investments. This approach protects assets while giving the Trustee the ability to provide meaningful assistance when Beneficiaries truly need it.
Do You Have Additional Questions about Trustee Authority?
For more information, please join us for an upcoming FREE seminar. If you have additional questions about how much authority a Trustee should have, contact the experienced Los Angeles trust attorneys at Schomer Law Group APC by calling (310) 337-7696 to schedule an appointment.
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