Carefully Weigh Options When Naming Trustees

As a tool for passing wealth to your heirs, revocable trusts offer many attractive benefits.  Because your assets are owned by the trust when you die, the process of settling your estate becomes relatively simple.  The trustee, whom you have appointed, distributes the trust property following the wishes you have spelled out in your trust document.  There is no need for involvement of the probate court, preserving your privacy and potentially saving time, expenses, and aggravation for your loved ones. 

When establishing a trust, one of the most important decisions you make is naming a successor trustee.  Typically, you will serve as your own trustee during your lifetime, while you are able.   A successor trustee steps in when you can no longer serve as trustee due to incapacity.  Most often, this successor trustee is a spouse.  With people aging into their 90s these days, periods of incapacity are becoming more prevalent, requiring a second successor trustee to step in.

Often, well-intentioned parents name the eldest child as successor trustee when one spouse has died and the surviving spouse is incapacitated, followed by other children in birth order.  This approach is appealing because it keeps financial management within the family.  However, problems can arise when the child is also a beneficiary of the trust, or is not well versed in handling accounting, investment and tax matters.

When serving as a trustee, the person you appoint becomes a fiduciary - a person who must set his or her own interests aside when acting for you.  Fiduciary responsibility is significant, is well defined in the law, and supersedes any interest the trustee may have in the trust assets after you are gone.  Because your interests and those of your beneficiaries are not aligned, this fiduciary duty comes with a conflict for trustees who are also beneficiaries. 

Beyond managing this conflict, your child’s duties as trustee will include providing an annual accounting to each of the beneficiaries, filing the various income tax returns (federal and state) for the trust and distributing tax return schedules to the beneficiaries in a timely fashion. 

The trustee must also decide how the trust assets are to be invested, a task that may require difficult choices.  Again a potential conflict arises because you and your beneficiaries may have competing investment goals - current income for you versus long-term growth for them.  Emotional ties can further complicate investment decisions for a child serving as trustee; for example, selling the family homestead after the surviving parent enters a nursing home.  Other poor investment decisions may be directly self-serving, such as using some of the trust’s money to start a new business or other risky venture. 

Another difficulty with naming individuals as successor trustees is that there is no guarantee that they will serve.  In our practice, we have seen a situation where two intelligent family friends were named as successor trustees.  When the trust grantor died, the first served for a short time, then resigned because the job was overwhelming. The backup trustee then declined to serve, leaving no viable trustee for the two daughters in their 20s. This void required court intervention to appoint a new trustee to take over administration of the trust.

As an alternative to naming individuals to handle the trustee duties in your stead, designating a trust company as successor trustee should be seriously considered.  While this option is often discounted as too impersonal, naming a financial institution specializing in trust services as a successor trustee has many benefits.
First, because a trust company is skilled in trust administration, it is unlikely to make errors in handling required accounting and tax filings.

Second, the problem of mortality of your successor trustee is solved when using a trust company, which has an unlimited life.  The trust company will also step in immediately when called to serve, eliminating the chance that the courts will have to name a successor if your relative or family friend declines the heavy responsibility.

Third, using a trust company eliminates emotional conflicts that can hinder the management of your trust.  Beneficiaries will generally view these independent trustees as evenhanded. The trust company will also provide objectivity in supervising investment policy and trust distributions, making sure these decisions are made according to your needs and wishes.

Finally, a trust company offers continuity in managing your investments.  If you already have a trusted relationship with a financial advisor, naming a trust company ensures the same people will manage the assets for your children or other beneficiaries.