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Investment and Distribution Trustees: Why Would I Need Both?

When creating a trust, it’s common to designate yourself as the initial trustee responsible for managing all aspects of the trust. However, there are situations where dividing the trustee’s responsibilities between multiple individuals, such as an investment trustee and a distribution trustee, can be beneficial. Let’s explore the reasons why you might consider bifurcating the duties of trustees in your trust document.


Specialized Knowledge and Skills

Trustees have various duties in trust administration, and dividing those duties among different trustees based on their expertise and skills can be advantageous. For instance, if your sister-in-law is knowledgeable about investments and experienced in financial decision-making, but not as skilled in handling interpersonal interactions, you can name her as the investment trustee. This trustee would focus solely on making discretionary investment decisions for the trust’s funds.


Discretionary Distributions

Some trusts allow distributions to be made at the discretion of the trustee rather than mandating specific amounts or percentages at certain times. In such cases, it can be helpful to appoint another trusted individual who is impartial, effective at communication, familiar with the beneficiaries, and capable of understanding their needs as the distribution trustee. This trustee would be responsible for deciding whether and when to accumulate or distribute the trust’s income or principal.


Managing Relationships and Conflicts

Dividing trustee responsibilities becomes particularly useful when there are complex relationships or potential conflicts among beneficiaries or between a trustee and a beneficiary. For example, if your second wife is one of the trustees, but the beneficiaries are your children from a previous marriage, appointing an unrelated third party as the distribution trustee may prevent feelings of unfairness or strained relationships. While having multiple trustees may increase expenses, it can help maintain family harmony and preserve relationships.


Enhanced Asset Protection

In many cases, a beneficiary’s interest in a trust may be protected from most creditors if the trustee isn’t obligated to make distributions. The level of protection often increases when a beneficiary has less control over the trust’s accounts and property. Even if the beneficiary is also the investment trustee, appointing a separate distribution trustee with discretionary authority can provide additional asset protection. In some jurisdictions, the trust may allow the beneficiary to resign as a trustee and appoint an independent trustee to replace them, further enhancing asset protection against potential future creditor claims.


Tax Minimization

When a trustee has complete discretion over trust distributions to themselves or others, the value of the trust’s assets may be included in the trustee’s estate for estate tax purposes, or the trustee may be subject to income taxes on trust income. By appointing an independent trustee, you can minimize estate or income taxes based on the type of trust and its intended goals. For example, an independent distribution trustee can help exclude trust property from the beneficiary-trustee’s estate for estate tax purposes. Similarly, if the trust is a nongrantor trust, having someone other than the grantor or related parties serve as the investment trustee can help ensure that the trust, rather than the grantor, pays taxes on trust income.


In summary, appointing separate investment and distribution trustees can provide benefits such as specialized expertise, discretionary decision-making, conflict management, enhanced asset protection, and tax minimization. While it may add complexity and incur additional fees, the advantages often outweigh the costs. Consult with an estate planning attorney at Celaya Law to design a trust that aligns with your goals, preserves family relationships, protects assets, and minimizes taxes.

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