Estate Planning

What's an Independent Trustee?

9 views June 27, 2014 1


Depending of the terms you’ve selected for your trust, your attorney might tell you that you need to choose an “independent trustee.” Who can you choose? It depends on the provisions of your trust. You should check with your lawyer before choosing your independent trustee, as your lawyer’s documents may differ from mine on this point.

An independent trustee is, for purposes of many of the trusts I have seen, someone who is NOT any of the following:

  • a contributor to the trust
  • a beneficiary of the trust
  • related or subordinate to someone who contributed money or property to the trust (called a “grantor”)
  • related or subordinate to a beneficiary of the trust

What does it mean to be “related or subordinate”? The term “related or subordinate” is defined in section 672(c) of the tax code. As you right imagine, the definition is a bit complicated. But generally, naming the following people can be problematic:

  • a spouse
  • a father or mother
  • a child, grandchild, great grandchild, etc.
  • a brother or sister
  • an employee of the grantor or beneficiary
  • a corporation or any employee of a corporation in which the stock holdings of the grantor or beneficiary and the trust are significant from the viewpoint of voting control
  • a subordinate employee of a corporation in which the grantor or beneficiary is an executive.

I said that naming the people listed above can be problematic. That’s because they’re only “related or subordinate” if they aren’t “adverse.” A person is “adverse” if he/she has a “substantial beneficial interest” in the trust, and his/her interest would be “adversely affected by the exercise or nonexercise of the power which he [or she] possesses respecting the trust”. That might sound complicated, and it kind of is. The determination of whether or not a particular person is “adverse” depends on the provisions of the trust. It’s something you should talk to your attorney about.

If you can’t find a suitable friend or relative to serve as your independent trustee, a professional fiduciary (e.g., a trust company) can be a good option. There are benefits to having a professional in the role of trustee: (1) a qualified professional will generally follow all the rules and terms of the trust, regardless of personal circumstances, and (2) many qualified professionals have the knowledge and resources to do a good job in the role of trustee.

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