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  • Barry Boscoe

Selecting a Successor Trustee

When it comes time to select a trustee for your living trust, which generally is established for family members, most of the time successor trustees will be a family member. This may not be the best choice. Those who create the trust, called grantors, trustors or settlors, will generally serve as trustees during their lifetimes. Who will serve as trustees upon the deaths of the grantors is a very important decision. There are several factors which should be considered when selecting a successor trustee for your living trust. The successor trustee plays a very important part and may be called upon as a result of either a death or incapacity of the grantor. The duties associated with the successor trustee are gathering and evaluating the assets, deciding on various investment strategies, and exercising control over the various businesses and business interests. In addition, the trustee will also have to deal with income and estate tax matters, which will include the preparation of the estate tax return. The last duty for the successor trustee is to allocate trust assets among the various sub-trusts and separate shares, which have been created by the terms of the living trust. Once the various sub-trusts have been set up, the trustee must then administer these trusts for the benefit of the designated beneficiaries. Although the trustee is bound by a fiduciary duty to all of the beneficiaries, the trustee generally will have a large amount of discretion. The area that raises the most concern regarding the trustee discretion is the discretion to make distributions to or for the benefit of the trust beneficiaries. In some cases, trusts will provide immediate distribution outright to the designated beneficiaries upon the beneficiary reaching a certain age. These types of distributions require very little exercise of discretion. However, trust assets that are held in trust to be distributed at the trustee’s discretion generally will have specific purposes to help guide the trustee. The most frequently used purpose is what is known as the ascertainable standard wherein the trustee, in the trustee’s discretion, makes distributions for the health, support, maintenance, and education of the beneficiaries. Since the distribution is at “the trustee’s discretion,” a concern arises with the fact that the trustee must exercise discretion fairly and reasonably and whether or not he will do so. Other concerns are whether or not he will be overly stingy or generous, or if he will take the time necessary to evaluate a requested distribution. Up and until the trustee has distributed all of the assets to the beneficiaries, the duties of the trustee are to manage, invest and dispose of the trust assets. This may sound simple, but often simple matters may be more complex than meet than the eye. As an example, the trustee must determine how to invest liquid assets for current income or for long term growth. More difficult issues arise when the trust holds controlling interest in a closely held business or assets that may require hands-on supervision, such as real estate. Will the trustee have the time and knowledge as to how to deal with these various types of assets? When selecting a trustee, the grantors’ options are generally among the beneficiaries, non-beneficiaries, and financial institutions and/or trust companies. Since these are very personal decisions, there is no single right answer. There are, however, advantages and disadvantages to each of the types of trustees listed above. The first group that most grantors look to are the beneficiaries of the trust, i.e. the children, when considering who should act as successor trustee. Many times this is done either by age, as to who is the oldest, but most often what we’ve seen is a co-trusteeship among the children. Naming all of the children as co-trustees has its own inherent problems, especially if the trust assets are not to be distributed outright. The children may not want their siblings to act as co-trustees over their share of the assets, directing and telling them what they can and cannot do with their money. More importantly, they could all agree amongst themselves to simply exercise their discretion and distribute all of the trust assets before the trust provisions allow. An alternative solution to the challenges listed above is to name one child, typically the oldest child, to act as the first successor trustee. However, the siblings may become very resentful that they were not chosen, and worse off, the children who are not serving as trustee may question all of the successor trustee’s decisions and attribute personal gain to the successor trustee as motive for the decisions being made. To top that off, if you then throw in the influence and possible resentment of the spouse of the children who were not designated as trustees, the possibility of creating a long standing disharmony in the family is greatly increased. Naturally, the second choice would be to name a non-beneficiary individual to act as the successor trustee. A non-beneficiary individual will generally include relatives of the grantors, close friends or a professional. Sometimes these individuals are often among the best choices as these types of individuals are fully capable of serving as a successor trustee. In many cases, they are already familiar with the family and have a clear understanding of what the grantors wanted. They are likely to exercise their discretion and make investment decisions they think the grantor would have wanted under the circumstances.

Having said that, there are several factors that should be considered. First among them is the age of the successor trustee and how old the trustee will be before the trust winds up. Having somebody who has lost their capability or their willingness to serve may not be the most desirable result for the role of a successor trustee. However, the fee the trustee may be receiving is a powerful incentive for the successor trustee to serve long after they have ceased to function effectively. One solution to this is to consider establishing an age where the trustee would be forced to step down. A second consideration is that many non-beneficiary individuals will be concerned with their liability to the beneficiaries in the event of a breach of their fiduciary duties. Unfortunately, this happens more often than not. Many times, in an effort to avoid discharging their duties, the individual will rely more heavily on outside professionals to advise on every decision. These additional professional fees could become substantial trust expenses. A third concern is whether or not the individual will be able to devote enough time to manage the trust assets. If not, mistakes could be very costly to the beneficiaries. A fourth consideration is as circumstances change, so do people. The person you have designated as successor trustee could suffer a serious financial reversal. It is possible that the trustee could abuse their power as trustee by making loans to themselves or to others. Finally, will your beneficiaries and the designated trustee retain a cordial relationship? It is conceivable the relationship could go south for any number or reasons, such as resentment, jealousy, ego, etc. Typically, when an individual is serving as trustee, the beneficiaries will be stuck with that trustee absent the showing of any kind of breach of fiduciary duty.

The last type of trustee to consider is a corporate trustee. Corporate trustee are usually rejected due to the perception of their impersonal service. Having said that, there are a substantial number of benefits and advantages, often making them the most attractive alternative. First, they are skilled in the area of trust administration, for this is their sole occupation. They are far less likely to make mistakes and are much more capable to correct them than individuals serving as trustees. The institutional nature of the trustee can actually be a benefit. There is no worry about the age of the trustee, and beneficiaries will generally view them as even handed. The likelihood of you having to amend your trust to amend successor trustees is vastly reduced. Third, corporate trustees are more cost efficient. This is due to the fact that their fee to serve as trustee is similar to what you would pay to an investment advisor. If you were to compare this to an individual trustee, who would typically charge a fee on top of hiring investment advisors and professionals, the fees could be substantially higher for the individual trustee. Naturally, these fees are taken from the beneficiaries through the trust. The best part about using a corporate trustee is the fact that that the beneficiaries will not be stuck with the selection. It is possible to provide the beneficiary the right to remove and designate a new financial institution, thus giving them the freedom to find and retain a trustee they can get along with.

Lastly, many clients already have relationships with financial institutions, and many times it is their desire to assure that the same people will continue to manage their assets for their children as they did for them. An individual trustee could easily choose someone else to manage the assets, thereby defeating the intention of the grantor to continue to use his advisors. The continuity of investment management is more likely to remain if the grantor names the financial institution he is currently working with. As you can see, the selection of a successor trustee is probably one of the most important decisions in designing your trust, since it will affect the lives of your beneficiaries for many years to come. It is important to consider the various options available and the factors involved in order to make the best decision for you and your beneficiaries.

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