Please use the following Table of Contents to find the appropriate topics in this section.
Procedures for Selecting Trustees
- Removal of Trustees
- Appointment of Successor Trustees
- Selecting Trustees as Successors
- Investment of Trust Property
- Legal Issues
- Accounting and Record Keeping
- Discretionary Authority
- Experience and Knowledge
- Time
- Costs and Fees
Professional vs. Family Trustees
- Professional Trustees
- Co-Trustees
Introduction
One of the more difficult decisions that you will have to make when establishing a revocable living trust is the selection of trustees. The decision is made more difficult by the many choices that exist. For example, you can name just one trustee or you can name more than one trustee; you can name family members, friends, professionals, or even a bank or trust company; and you can name any combination of family members, friends, professionals, banks or trust companies. The decision is further complicated by the vast array of choices available, then compounded by the fact that whomever you choose as a trustee will have substantial authority over your property in the event of your death or disability. No one will ever say that selecting trustees for a living trust is easy. In fact, most people say that selecting trustees is the most difficult decision they had to make when designing their living trust.
Of course, the assumption is that you will name yourself as the sole trustee when you establish your revocable living trust. If you were establishing a trust for the purpose of making charitable contributions, or to exclude certain assets from estate taxation, or because of a divorce or for some political reason, then the trust would probably be irrevocable and someone else would have to serve as trustee. But, here, the assumption is that you are establishing a revocable living trust for estate planning purposes, where the goal is to establish a vehicle to manage your property in the event of your disability, to avoid probate of that property in the event of your death, and to distribute that property to your intended beneficiaries after your death. In that case, there are no prohibitions against your serving as the sole trustee. That is important because, as the sole trustee, you will retain the same control over the property that you had before the trust was established.
The benefit of having a revocable living trust, serving as the sole trustee, and funding it during your lifetime, is that you have a mechanism in place to transfer control of your property to the right people if you die or become disabled, or if you just get tired of taking care of your property on your own. In all those situations, you will have to step down as the sole trustee, and someone else will have to take over. If you are well enough to make that decision, fine. But, if you’re not, then someone else will make that decision for you. As the creator of the trust, you have the right to say who will succeed you as trustee.
That is one of the most important powers or rights that you have as the creator of the trust because the successor trustee will step into your shoes and be responsible for the management and investment of the trust property. And, the successor trustee will have the power to make distributions of income and/or principal to you and others during your lifetime and to your designated beneficiaries upon your death. It goes without saying that selecting trustees for your revocable living trust is extremely important because the successor trustee or trustees will have significant powers over the trust property and may also have significant powers over the health, maintenance, education, and welfare of your spouse, children and other family members.
If you establish a revocable living trust, don't take the process of selecting trustees lightly. Unfortunately, many people do because it often involves making some rather difficult decisions. Resist the temptation - take the time to consider your options, discuss it with your loved ones and your professional advisors, and make the best available decision. Then, be sure to review that decision each and every year with your loved ones and your professional advisors. Don't be afraid to spend a few dollars for professional advice. It will be money very well spent, indeed!
Procedures for Selecting Trustees
When your living trust instrument is prepared, it should contain provisions regarding the powers and duties of the trustees, not only the original trustee (which will probably be you) but the successor trustees as well. In addition, it should contain procedures for the resignation and removal of trustees and the appointment of successor trustees. Although those procedures will vary from trust to trust, at least some consideration should be given to the following:
1. Resignation of Trustees. The trust instrument should clearly provide that any trustee (whether the original trustee or any successor trustee) has the right to resign at any time. As a practical matter, you can't force someone to do something that he or she doesn't want to do. However, you do want to insure an orderly transition from the resigning trustee to a successor trustee. For example, you may want to get an accounting of the trust property before a successor trustee takes over, certain bills may have to be paid, beneficiaries may be expecting payments, and critical investment decisions may have to be made. You don't want to be without a trustee for any lengthy period of time. Therefore, it is generally advisable to require that the resignation of a trustee will not become effective until at least thirty (30) days after written notice of the resignation has been given to you, if living, or to the current income beneficiaries of the trust, if you are not living. If a current income beneficiary is a minor, then the trust instrument should also provide that written notice must be given to the guardian of such minor beneficiary. These notice requirements will insure that you and/or other beneficiaries of the trust have sufficient time to have a successor trustee in place before the resigning trustee actually resigns.
2. Removal of Trustees. The trust instrument should also provide that you, as the creator of the trust, have the right to remove a trustee at any time with or without cause. It's your trust! If you don't like what a trustee is doing, then you should have the absolute right to remove that trustee and appoint someone else. The more difficult question is whether any of the beneficiaries of your trust should have the right to remove a trustee after your death and, if so, for what reason. Beneficiaries often have conflicting interests, so it is difficult to say when the beneficiaries should be able to remove a trustee. If a trustee is not responsive to his or her duties, then that trustee should be removed. However, if the beneficiaries want the trustee to do something that was not intended by you when the trust was created, then the beneficiaries should not be able to remove the trustee.
Experience in these matters suggests that, if you do give your beneficiaries the right to remove a trustee, you should then limit their selection of a successor trustee. For example, you may say that if a trustee is removed then any successor trustee must be a bank having trust powers. This is an area where the advice of a professional is critical in the formulation of your living trust instrument.
3. Appointment of Successor Trustees. The trust instrument should also provide that you have the right to appoint one or more successor trustees upon the resignation or removal of any trustee. This right will insure that you retain as much control as possible over the management of your property in the event you voluntarily or involuntarily resign as the sole trustee.
4. Selecting Trustees as Successors. Of course, there may come a time when a successor trustee resigns and you are not able to select a successor trustee, either because of your death or incapacity. In that case, you can still exercise some control over the trust through the selection of one or more successor trustees in the trust instrument. For example, consider the following provision that is commonly found in a revocable living trust instrument:
"Appointment of Successor Trustees. In the event of my resignation as Trustee hereunder, or in the event of my inability to serve as Trustee hereunder, I reserve the right to appoint a successor Trustee or Trustees in my place. If I am unable to appoint a successor Trustee, either because of my death or my incapacity, then I appoint my good friend, John Doe, as successor trustee. If my good friend, John Doe, fails or ceases to serve as successor trustee for any reason, then I appoint the ABC Bank as successor trustee.”
It should be very clear that the provisions in a trust instrument pertaining to the resignation and removal of trustees and the appointment of successor trustees are extremely important, and considerable care should be taken when drafting these provisions. To a large degree, the success of your overall estate plan will depend upon the people who are charged with the responsibility of carrying it out after your death or incapacity. These people have considerable power to make decisions regarding the investment of trust property, the payment of expenses, and the distribution of income and/or principal to your intended beneficiaries.
Responsibilities of a Trustee
Because a trustee has such responsibilities in the management, investment, and distribution of trust property, it is important that we briefly summarize those responsibilities at this point:
1. Investment of Trust Property. A trustee's duty is not merely to hold and safeguard the trust property. A trustee actually has a duty to make the trust property productive. In other words, a trustee can't just let the money sit around idle. It must be invested so as to earn a reasonable income for the beneficiaries. A trustee's duty in this regard is to invest the trust property in such a way as to balance the interests of the beneficiaries. Some beneficiaries will have a need for income, some will prefer to grow the principal. Some beneficiaries will have a low tolerance for risk, some will be anxious to gamble on anything. A trustee's duties are somewhat complicated by the diverse interests of the beneficiaries.
2. Legal Issues. A trustee is responsible for the management and administration of the trust, including the preparation and filing of income tax returns for the trust and the payment of income taxes. If you (the grantor) are serving as the sole trustee, then the trust is not considered a separate taxable entity. In that case, the trust property is invested under your social security number and the income is reported on your personal income tax return (Form 1040). However, once someone else becomes a trustee, then the trust becomes a separate taxable entity and is required to have its own employer identification number (EIN). It also files its own tax return (Form 1041).
The trustee has other legal responsibilities as well. For example, the trustee must be sure that the administration of the trust is in conformity with applicable federal and state laws; that the trust instrument is being interpreted correctly; that ambiguities in the trust instrument are resolved; and that legal actions affecting the trust are defended and prosecuted, where necessary or desirable.
3. Accounting and Record Keeping. A trustee must keep custody of the trust property and must keep an accurate record of all transactions affecting the trust property. The trustee must also provide an accounting of the trust property in accordance with state law.
4. Discretionary Authority. A trustee is often given discretionary authority over the distribution of income and/or principal to beneficiaries, often without regard to equalizing distributions among the various beneficiaries. The trustee's responsibility in this regard is to understand the intentions of the grantor and the needs and expectations of the beneficiaries. Moreover, the responsibility of the trustee is to act impartially and without bias toward any one or more of the beneficiaries.
Qualities of a Trustee
There are many qualities that should be considered when selecting trustees, including the following:
1. Personal Characteristics. Any person selected to serve as a trustee must be fundamentally honest and sincere. In addition, such person must have the highest integrity and must be able to act decisively and fairly. Moreover, it is important that any such person be financially secure in his or her own right so as to lessen the risk of self-dealing. And, since the interests of the beneficiaries are often at odds with each other, it is important that the trustee be able to maintain effective communications with all beneficiaries while maintaining confidentiality with those outside the trust.
2. Experience and Knowledge. A trustee must have sufficient knowledge to be an effective manager of the trust property. That does not mean that a trustee must be thoroughly versed in all matters of the law and investments and the like. However, it does mean that he or she must have sufficient knowledge and experience so that he or she knows enough to ask for help when the time comes. A trustee must be able to recognize problems when they arise, seek the advice of professionals when necessary, and make reasoned decisions in a timely manner.
3. Time. A trustee must understand the needs of the trust and be able to devote the necessary time and effort to carrying out the responsibilities of the trust.
4. Costs and Fees . A trustee must recognize the value and importance of all services required for the effective administration of the trust and the trustee must be willing to incur costs that are reasonable and appropriate for the size and complexity of the trust.
5. Characteristics of the Trust. Each trust is somewhat different. Few trusts have the same property, the same values, the same needs of the beneficiaries, and the same interests of the grantors. The process of selecting trustees should take these characteristics into consideration. Some trusts may value the investment expertise of a trustee more than any other attribute. Others may place a high value on the personal relationship that a trustee has with the family. These characteristics are mainly subjective and must be evaluated and prioritized by you (the grantor). Again, the services of an experienced, independent professional can be invaluable in this situation.
Professional vs. Family Trustees
A. Family Trustees
Family members are logical candidates to serve as successor trustees for several reasons. First, they are familiar with the dynamics of your family and your intentions regarding your property and your family. Second, they are often willing to serve as trustee with little or no pay for their services. Third, you are well acquainted with these family members and can readily assess how well they would perform as trustee.
Despite the many positive attributes that family members bring to the position of trustee, there are often some rather negative attributes as well. For example, consider the following:
A well-intentioned family member may lack the time and/or experience to deal with trust issues as they arise. The family member could hire experienced professionals whenever necessary, but the costs for those professionals may negate the cost-saving attributes of using a family member in the first place.
A family member who has an interest in the trust may not be able to act fairly or in an unbiased manner when it comes to important trust decisions. For example, assume that Sam creates a living trust and names his son, Jim, as the successor trustee. The trust instrument provides that, after your death, your uncle, Harry, is to get all the income from the trust during his lifetime. Upon his death, the remainder of the trust property will go to Jim. As the successor trustee, Jim has the responsibility for investing the trust property. If he invests in interest-bearing accounts (bonds, CDS, etc.), the trust will earn roughly 5% per year. Under the terms of the trust instrument, that interest is required to be distributed to uncle Harry.
However, if Jim invests all the trust property in growth stock, the trust will generate no income and, therefore, no distributions will be made to uncle Harry during his lifetime. Although the growth stock will appreciate in value between the time of sam's death and uncle Harry's death, that growth is not considered income under most state laws for trust accounting purposes. Therefore, upon uncle Harry's death, the value of the property distributable to Jim will be much higher than if Jim invested in interest-bearing accounts. Because of Jim's power to control investments, he has the power to effectively defeat uncle Harry's interest in the trust for his own benefit. Whether a family member can remain impartial under these circumstances is certainly open to debate. Moreover, it almost always will result in a confrontation between family members.
There may be adverse tax consequences as well. If a family member is also a beneficiary, then adverse income tax and even estate tax consequences may arise if that family member has discretionary power to distribute income and/or principal among the beneficiaries. The federal tax laws provide that the family member, in that case, may be subject to taxation on all of the trust income and may even have all of the trust property included in his or her estate for federal estate tax purposes if he or she dies before the termination of the trust. If family members are designated as successor trustees, it is always a very good idea to get the opinion of a qualified tax professional.
B. Professional Trustees
The term "professional trustee" is used merely to distinguish a non-family trustee from all family trustees. A professional trustee can include a bank, a trust company, an accountant, an attorney, or any other private individual who is paid for his or her services as trustee. Individuals have the power to act as trustees, as a matter of law. The only legal requirement is that they be of legal age; i.e., age 18 in most states. An entity other than an individual, such as a bank or trust company, can act as a trustee only if it has been given trust powers under federal or state law. Commercial banks generally have trust powers whereas savings banks and credit unions do not.
Professional trustees have certain attributes that make them very attractive to certain grantors. First, they generally have the skill and expertise necessary for the effective management and administration of a trust. Banks and trust companies are particularly adept at managing and investing property. Accountants are very skilled at tax planning and tax preparation, as well as understanding the financial and business needs of a trust. Attorneys are very skilled in the legal aspects of a trust and the laws governing estate planning, wills, probate and the like.
Second, a professional trustee is more likely to be impartial. That is not always the case, but it is more likely than a family trustee.
Third, a professional trustee often has sufficient capital behind it to obviate the concern for self-dealing. And, professional trustees often carry liability insurance to protect against any losses caused by malpractice, including errors and omissions.
Finally, professional entity trustees have continuity of operations. Banks and trust companies tend to stay in existence even though they may merge with, or be bought out by, other banks or trust companies. This may be very important for a trust that is designed to last for many years. Individuals, whether professional or family, do not last forever. They tend to move, retire, become disabled, and even die and, when they do, they cease to be a trustee.
Despite the many positive attributes that professionals bring to the position of trustee, there are often some rather negative attributes here as well. For example, consider the following:
Professional trustees charge fees for their services. Sometimes the fees charged are based upon the size of the trust fund or the amount of income produced. Other times, the fees charged are based upon an hourly rate. Whether the fees charged are justified is often subjective. However, if impartiality and investment expertise is high on your list, then the fees charged should not kill the deal. Fees can be controlled if you (or your beneficiaries) take the time to understand the work involved and the fees to be charged, and are willing to negotiate and/or shop around. Too often, people don't ask questions until the bills arrive, and then it's too late.
Professional trustees don't always have the time to attend to their duties as trustee. Often, their duties are delegated to staff members who may or may not have the knowledge and/or experience to handle important matters.
Even if you decide to name a professional trustee as your successor trustee, the question is "which one?" Here is a list of the more important considerations:
C. Co-Trustees
Nothing is absolute when selecting trustees for your living trust. You don't have to name just family members or professionals. In fact, you can name any combination of successor trustees that you wish. Nonetheless, there are certain advantages and disadvantages to naming both a family member and a professional as co-trustees:
A potential advantage to the naming of a family member and a professional as successor co-trustees is that you can get the best of both worlds. The family trustee can provide a valuable insight into the needs of the beneficiaries and the professional can provide the skill and expertise needed for the efficient administration of the trust.
A potential disadvantage is that the costs may be higher than with just one or the other. Many professionals will not - or cannot - split fees with non-professionals. The family member may also decide to charge fees if a professional co-trustee is charging for its services.
With most decisions, the successor trustees must act unanimously unless the trust instrument provides otherwise. Professional trustees often become frustrated whenever they need a family member to consent to some action by the trust. With more than one family member serving - and with all in different geographical locations - it can become overwhelming.
Whenever discretionary distributions are contemplated, the family member will not be allowed to participate without adverse tax consequences, unless the trust instrument contains special provisions. This may serve to defeat the purpose of having a family member as a co-trustee. Again, the services of a qualified professional advisor are extremely important if these circumstances exist in your situation.
Some General Do's and Don'ts
If you name an individual as a successor trustee, do make sure that you name at least one alternate trustee in case the named successor cannot serve in that capacity. In fact, you should name two or more alternate trustees just to be safe. The theory is that you are better able to name successor trustees than anyone else. So why give anyone else the opportunity?
Do not name one of your children as successor trustee if you have more than one child, unless you have a very good reason. The reason is that you will automatically drive a wedge between your children and they may never talk to each other again. That is certainly not your intention, so don't let it happen. Either make all your children co-trustees or name a professional trustee. Of course, there are circumstances where this rule doesn't apply; i.e., when one child is very young and another is considerably older; where one child is unable to serve as a trustee for one reason or another (disability, incarceration, geographical location, lack of interest, etc.).
Do not name your children as successor trustees of a trust established solely for your spouse (i.e., a marital trust) or a trust where your children and your spouse have conflicting interests, especially when your children are from a different marriage. Again, don't put your loved ones at odds with each other. Your intent is to provide for them because you love them. You certainly don't want to facilitate a strained relationship. In these situations, bite the bullet, pay the extra fees, and hire a professional.
Do not appoint a professional trustee unless that professional trustee has liability insurance and sufficient capital to sustain its operations. Professional trustees without adequate capital and without adequate liability insurance coverage can result in self-dealing that severely depletes the trust without any way for your beneficiaries to recover the loss. Remember, one of the claimed advantages of a living trust is lack of probate court supervision. That can be a real disadvantage if a successor trustee is engaging in self-dealing, especially if there is no liability insurance to cover the loss. Don't be afraid to ask before you hire.
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