Choosing a Trustee: Family Member, Trust Company or Both

Most people spend months on what a trust says and very little time on who will carry it out. The second decision often matters more. A carefully drafted trust in the wrong hands can produce years of friction, unnecessary cost and, at worst, litigation between family members.

Before joining Vaquero, I spent most of my career in trust administration at large corporate trustees. The problem I saw most often was not bad faith. It was a mismatch: the trustee was chosen out of loyalty or convenience, and the job turned out to need something else.

There are three broad choices. An individual, usually a family member or trusted friend. A corporate trustee, meaning a bank or trust company. Or a split arrangement, in which a trust company handles administration while someone else directs the investments.

What the Job Involves

A trustee is a fiduciary. In Texas, that means acting loyally and impartially for the beneficiaries, following the trust’s terms, investing under the prudent investor standard unless the trust provides otherwise, keeping records, and keeping beneficiaries informed. A trustee who breaches those duties can be held liable for the resulting loss. Texas allows a trustee reasonable compensation unless the trust says otherwise, and no trust document can relieve a trustee of liability for a breach committed in bad faith, intentionally, or with reckless indifference to a beneficiary’s interest, or let the trustee keep a profit from a breach.

The work continues for as long as the trust lasts, sometimes for generations: tax returns, distributions, statements and beneficiary questions. Our article on becoming your own trustee covers the first steps for someone new to the role.

The Individual Trustee

Strengths

• Cost. A family member may serve for little or no fee. The trust still pays for the legal, tax and investment help the trustee hires.
• Personal knowledge. An individual who knows the beneficiaries and understood the grantor’s intent brings context an institution may not have.
• Flexibility. An individual is not bound by institutional policy and can be more willing to hold a family business, real estate or mineral interests, within the trust’s terms and the duty to invest prudently. Distribution decisions can likewise fit a family’s circumstances, within the trust’s standards.

Drawbacks

• Strain on relationships. Saying no to a sibling’s distribution request, or yes to one child and not another, can damage relationships that outlast the trust.
• Bias, or the appearance of it. When the trustee is also a beneficiary, or related to one, even a fair decision can look partial.
• Personal liability. An individual trustee can be personally liable for losses caused by a breach of duty, including an honest mistake, unless the trust document relieves the trustee of liability for ordinary negligence. Many people agree to serve without understanding that.
• Expertise and time. The role touches tax, accounting, investments and law. Texas lets a trustee delegate investment functions to a professional, but the trustee remains responsible for choosing that professional and reviewing the work.
• Age and capacity. An individual can become ill, incapacitated or tired of the job, so the trust needs named successors.

The Corporate Trustee

Strengths

• Continuity. An institution does not age, become incapacitated or die, though it can merge, be acquired or resign. For a trust meant to last generations, continuity matters.
• Expertise. Administration, tax reporting, recordkeeping and distribution standards are handled by people who do this work every day.
• Regulation. In Texas, state trust companies are chartered and examined by the Texas Department of Banking, and national trust banks are supervised by the Office of the Comptroller of the Currency. An individual trustee answers to the beneficiaries and the courts, not to a banking examiner. Regulation is oversight of the institution, not a guarantee of any particular decision.

Drawbacks

• Fewer investment choices. A corporate trustee may prefer its own investment platform or an approved list, and may be reluctant to hold, or charge more to hold, a family business, real estate or mineral interests.
• Additional fees. A corporate trustee may charge an annual fee based on trust assets, and may set a minimum or charge separately for specialized assets. Our article on fee structures explains what to look for.
• Policy before people. Decisions run through committees and written policies. That consistency guards against favoritism but can feel impersonal and inflexible when a family’s situation does not fit.
• Personnel changes. The institution persists, but the trust officer who knows your family may not.

The Split Approach: A Directed or “Administrative” Trustee

“Administrative trustee” is industry shorthand, not a term in Texas law. It describes a trust company that handles administration while investment decisions are made by someone else. Texas law has recognized a power to direct a trustee since at least 2006, and the current, more detailed statute dates from 2015. The trust document names an “advisor” with the power to direct the trustee, often on investments.

Under Texas law, a trustee that follows the advisor’s direction is not liable for doing so, except in cases of wilful misconduct. And unless the trust says otherwise, the trustee has no duty to monitor the advisor, or to warn beneficiaries when it would have decided differently. The advisor is generally a fiduciary.

Strengths

• The corporate trustee’s strengths on administration. Continuity, expertise and regulatory oversight apply to the recordkeeping, tax reporting, distributions and beneficiary communication.
• Investment flexibility. The grantor, or whoever the trust empowers, can name the investment advisor, and the trust can hold concentrated or unusual assets that a full-service trustee might resist. Concentration carries its own risk, and the advisor remains a fiduciary bound by the trust’s terms.
• Split responsibilities. Administration and investment management are assigned to separate parties, each chosen for its role.

Drawbacks

• Two parties, two fees. The total may be lower or higher than one full-service trustee, so compare it.
• Drafting has to be precise. The trust must say clearly who decides what, and who succeeds the advisor.
• Accountability for investments sits with the advisor. Because the trustee generally has no duty to second-guess investment directions, the choice of advisor carries more weight.
• Existing trusts may not convert easily. Changing an irrevocable trust to a directed structure may be possible in some cases, by court modification or by moving assets into a new trust under Texas’s decanting rules, but each has limits and requires counsel.

Where the Trust Is Administered

Texas families often hear that a trust belongs in Delaware, South Dakota or Nevada. For a new trust that needs a corporate trustee, those states’ laws can offer features Texas does not. For an existing trust, a move is sometimes worth it but needs to be carefully considered.

• Income tax is rarely the reason. Texas has no personal income tax.
• Directed trust protection. Texas already has its own statute. South Dakota’s goes further: a trustee that follows a direction is not liable for the resulting losses, without the wilful-misconduct exception Texas keeps. Delaware uses a wilful-misconduct standard similar to Texas.
• Privacy. Delaware and South Dakota let a trust limit or delay what beneficiaries are told about it. Texas allows less. In an irrevocable Texas trust, the document cannot switch off the duty to keep a beneficiary informed once that beneficiary is 25 or older and either eligible for distributions or would receive one if the trust ended.
• Protection from your own creditors. Texas does not protect a trust you create for your own benefit from your creditors. Delaware, South Dakota and Nevada allow such trusts under conditions. Whether a Texas court, or a bankruptcy court, would respect one created by a Texas resident is unsettled.
• Duration. Texas now allows a trust that became irrevocable on or after September 1, 2021, to last up to 300 years.

Our current practice. When a client’s irrevocable trust needs a corporate trustee, we currently use South Dakota, with a trust company there as trustee. It is a preference, not a rule. The right state for any trust depends on its terms, its assets and the family, and the decision belongs with the client and the client’s estate attorney.

Moving administration does not always change which state’s law governs the trust; that depends on the document and sometimes a court. A move also has costs: a trustee in the new state, counsel in both states, and a document, court order or decanting that permits it. A trust with Texas beneficiaries and Texas assets keeps connections to Texas wherever it is administered. The questions belong with an estate attorney; our list of questions to ask an estate planning attorney is a starting point.

Questions to Settle Before You Name Anyone

1. 1What will the trust hold? A marketable portfolio is a different job from an operating business, real estate or mineral interests.
2. 2How long will it last, and who succeeds the first trustee?
3. 3How much judgment will distributions require? The more discretion the trustee has, the more relationships are at stake in each decision.
4. 4Who will make investment decisions, and who checks them?
5. 5What will it cost, with every party included?
6. 6How can the trustee be replaced? Named successors and a clear way to remove and replace a trustee prevent a great deal of grief.

The right trustee depends on the assets, the people and how long the trust must last. If you are drafting a new trust, or living with one that no longer fits, we’re glad to talk it through alongside your estate attorney.