The Hidden Pitfalls of Naming Friends or Family as Trustees for Your Adult Children
When planning your estate, one of the most significant decisions you'll face is choosing who will manage the assets you leave behind for your children. Many people automatically choose a close friend or family member without fully understanding the complications this decision can create.
As an estate planning attorney with three decades of experience, I've seen firsthand how these well-intentioned choices often lead to family conflict, administrative headaches, and even financial mismanagement.
The Trustee Role: Far More Complex Than Most Realize
Being a trustee isn't simply about writing occasional checks to your children. It's a demanding position with serious legal responsibilities and potential liabilities that many friends and family members aren't equipped to handle.
A trustee must:
- Invest and manage trust assets prudently
- Keep detailed financial records
- File annual tax returns
- Distribute funds according to specific trust terms
- Communicate regularly with beneficiaries
- Make sometimes difficult discretionary decisions
- Remain impartial when conflicts arise
Let's explore why appointing someone close to you as trustee for your adult children's inheritance might not be the wisest choice.
The Burden of Fiduciary Duty
What Does "Fiduciary Duty" Really Mean?
When you name someone as trustee, you're placing them in a fiduciary position – one of the highest legal standards of care that exists. They must act solely in the best interests of the beneficiaries (your children), even if that conflicts with their own interests or wishes.
Many people don't realize that trustees can be personally liable if they make mistakes – even honest ones. This responsibility weighs heavily on most non-professional trustees.
Real-Life Example: James named his brother Robert as trustee for his three adult children. When the market crashed, Robert, trying to protect the trust assets, moved everything to cash. The market rebounded, but the trust missed significant gains. The beneficiaries sued Robert for failing to properly diversify investments, and he was held personally liable for the lost growth opportunity.
The Investment Management Challenge
Your trustee needs to work with financial advisors to ensure trust funds are:
- Properly invested based on modern portfolio theory
- Appropriately diversified
- Balanced between growth and income
- Managed with tax consequences in mind
- Regularly reviewed and adjusted
This isn't a simple "set it and forget it" task. It requires ongoing attention and financial sophistication.
Tax Complications and Administrative Burdens
Annual Tax Filings Can't Be Overlooked
Trusts have their own tax rules, and trustees are responsible for:
- Filing annual trust tax returns
- Providing K-1 forms to beneficiaries
- Making tax elections that impact beneficiaries
- Potentially making estimated tax payments
Even a single missed filing can create significant problems and potential penalties.
Real-Life Example: Martha, a dedicated aunt, agreed to serve as trustee for her nieces and nephew. Despite her good intentions, she didn't realize trusts needed separate tax ID numbers and annual filings. Three years later, when she consulted a professional, the trust faced substantial penalties and interest for late filings.
The Administrative Time Commitment
Managing a trust properly typically requires:
- Regular account reconciliation
- Detailed record-keeping
- Responses to beneficiary requests
- Coordination with financial advisors, accountants, and attorneys
This workload comes at a time when your friend or family member may be:
- Managing their own retirement
- Dealing with health issues
- Caring for their own family members
- Wanting to travel or enjoy their later years
The Relationship Strain Factor
When Business and Family Don't Mix
Perhaps the most overlooked consequence of naming a friend or family member as trustee is the strain it places on relationships.
Your trustee will need to:
- Say "no" to distribution requests that don't align with trust terms
- Make seemingly subjective judgments about what's in a beneficiary's best interest
- Potentially withhold funds from beneficiaries who feel entitled to them
- Navigate family dynamics while remaining impartial
Real-Life Example: Susan named her sister Janet as trustee for her two daughters. The trust allowed distributions for health, education, maintenance and support, but Janet had to deny her niece's request for funds to start a business. This created a rift that eventually extended to the entire family, with relatives taking sides and holiday gatherings becoming tense affairs.
The Resignation Reality
Many trustees initially accept the role out of a sense of duty or honor, without fully understanding what they're getting into. Once they experience the workload, liability, and potential family conflict, many resign.
This creates disruption in trust administration and often leads to:
- Court proceedings to appoint a successor trustee
- Delays in distributions to beneficiaries
- Additional expenses for the trust
- Possible hard feelings among family members
When Family Trustees Make Sense (And When They Don't)
To be clear, naming friends or family as trustees can be appropriate in certain situations:
When Family Trustees Work Well:
- For minor children (though professional co-trustees may still be advisable)
- For special needs or supplemental needs trusts where the trustee knows the beneficiary well
- When the trust is designed to terminate and distribute all assets when children reach a certain age (like 25 or 30)
- When the trustee is only managing the trust temporarily to wrap up affairs and distribute assets outright
When Professional Trustees Are Often Better:
- For long-term trust management for adult children who aren't capable of doing it themselves
- When significant assets are involved
- When beneficiaries have complicated financial situations
- When family dynamics are already strained
- When impartiality is especially important
- When specialized investment or tax knowledge is needed
The Professional Alternative
What Professional Trustees Bring to the Table
Professional trustees (like trust companies, bank trust departments, or in some cases, law firms) offer significant advantages:
- Expertise in investment management and trust law
- Objectivity and impartiality when making distributions
- Continuity (they don't retire, get sick, or go on vacation)
- Systems for proper record-keeping and reporting
- Built-in checks and balances
- Familiarity with tax requirements
- No emotional entanglements with beneficiaries
Real-Life Example: The Wilson family switched from a family friend trustee to a professional trust company after years of tension. Their adult children reported that distribution requests became less stressful, investment returns improved, and family gatherings could once again focus on their relationships rather than trust business.
The Hybrid Solution
For many families, the best approach is a hybrid solution:
- A professional trustee handles investments, accounting, and legal compliance
- A trust protector (often a family member) has oversight authority
- A distribution committee that includes family members provides input on discretionary distributions
This approach combines professional expertise with family insights.
Making the Right Choice for Your Family
Questions to Consider
Before naming a trustee for your adult children's inheritance, ask yourself:
- Does my chosen trustee truly understand the responsibilities involved?
- Will they have the time, knowledge, and temperament to serve effectively?
- How might this role affect their relationship with my children?
- Will they be able to say "no" when necessary?
- Do they have the financial sophistication to manage investments?
- Are they likely to outlive the trust term?
- Will they remain impartial when conflicts arise?
The Cost Consideration
Many people choose family trustees to save on trustee fees. However, this approach often proves penny-wise and pound-foolish. Professional trustees typically charge 1-1.5% of assets annually, but consider what you're getting:
- Investment management (which you'd likely pay for anyway)
- Tax preparation and filing
- Distribution administration
- Record-keeping and reporting
- Institutional knowledge and continuity
- Liability protection
When you factor in the potential costs of mistakes, family conflict, and lost opportunity, professional trust management often proves well worth the expense.
Conclusion: Protecting Your Legacy and Family Harmony
Your estate plan should do more than just transfer assets—it should preserve family relationships and promote harmony. The choice of trustee significantly impacts whether these goals are achieved.
While naming a friend or family member as trustee might seem like the most personal choice, for trusts benefiting adult children, it often creates unnecessary burdens and strains the very relationships you value most.
By carefully considering the complex responsibilities of trusteeship and exploring professional options, you can create an estate plan that truly serves your family's long-term interests.
Whether you're creating a new estate plan or reviewing an existing one, trustee selection deserves thoughtful consideration. The right choice can mean the difference between a legacy of family harmony and one of conflict and resentment.
If you would like to discover more about how to choose the right trustee, click here to read our complete guide to choosing the right trustee.
At Roulet Law Firm, P.A., we help families in Minnesota and Florida create sophisticated, custom-tailored estate plans that protect assets and preserve family relationships. With offices in Minnetonka, MN and Venice, FL, our team provides the expertise of a large firm with the personal touch of a boutique practice. Call us today at our Florida office at 941-909-4644 or our Minnetonka, Minnesota office at 763-420-5087 to discuss how we can help protect your legacy and ensure your wishes are carried out exactly as you intend. Or you can fill out the contact form on this page and a member of our team will reach out to you to schedule your consultation.
If you would like to discover more, join us in my upcoming masterclass where I reveal strategies I use with my private clients to help them avoid probate, save on taxes, protect the money they leave for their kids in the event they get divorced, and much more. click here to sign up.
