Trustee selection is an important part of estate planning, yet many grantors overlook it in their planning process. The reality is that you’ll likely need to name multiple trustees in case the one you selected is no longer able or willing to act. We often see grantors take a default approach: “my spouse, one of my kids, and then a professional trustee.” But before you go that route, make sure it really makes the most sense for you and your family. The job of trustee can be a big one, with many emotional aspects in addition to significant administrative burdens. Keep in mind that much of a trustee’s work takes place during the very difficult time when a loved one has recently passed away.
When and how do trustees act?
Many people think trustees only step in after the grantor passes away, but that’s not always the case. It’s important to consider the role the trustee may play during the grantor’s lifetime when settling the estate and administering the trust.
- During lifetime of the grantor: Many people lose the capacity to handle their financial affairs while they’re alive. Others have the ability to manage their affairs, but unfortunately things slip through the cracks because the grantor has some capacity but lacks the judgment they once had. Inequitable decisions may be made about gifting to children. Bills may not get paid, insurance may not be reviewed, investments may not be well managed, and homes may not be properly maintained. Sometimes, elder abuse takes place — the grantor falls for a fraudulent scheme or someone takes advantage of them. This can be a good time for a trustee to step in and assist and also to simplify future estate settlements by making sure all financial affairs are in order before the grantor passes away.
- Settling the estate: This involves collecting and inventorying , valuing, and retitling the assets from the individual or living trust to a beneficiary or irrevocable trust. It could also involve the sale of assets, including investments or real estate. Partnerships and businesses have their own succession plan outlined in the organizational agreements. Tax filings are required. In addition, legal requirements must be met, including filing a probate estate, publishing a notice to creditors, issuing notice to beneficiaries, and other items. This process can take up to 24 months.
- Administering the trust: Once the estate is settled, the trustee’s role shifts to ongoing administration of an irrevocable trust. This may include distributing the assets outright to the beneficiaries, or overseeing a trust that continues for many years. It might be until the beneficiary reaches a certain age or for one or more generations. During this time, the trustee’s role is to oversee the assets, provide accountings (typically annually), file tax returns, make distributions of income and principal, and continue to act in a fiduciary manner.
As you can see, trustees are responsible for big-picture decisions and administrative duties. When considering who should take on the role, it’s important to consider both competency (technical ability to get this done) and capacity (desire and availability to do the work required).
Trustee succession: Acting alone or together?
Grantors not only choose who acts as trustee but also the order of succession of those parties and whether those parties should act together. For example, as you get older, you may want to retain control but also get some additional help. After you’ve passed, your spouse and/or kids may want to be involved but with the assistance of a professional to handle the administrative details and make sure the Is are dotted and Ts are crossed.
Or, you may want a spouse or child to have some say in the big-picture decisions like who gets a certain piece of personal property or what happens to the family cottage, yet you don’t want to burden them with the administrative tasks.
Sometimes the decisions that need to be made are challenging. A beneficiary may want a large distribution and the trustee may disagree, for example. These situations can put the trustee in difficult positions with family members, and it may be beneficial to have an impartial third party (who doesn’t attend Thanksgiving dinner!) make the decision.
Too many trustees can add unnecessary complexity
We often hear individuals say, “After my spouse, I want my three kids to work together.” That seems fair; it doesn’t give one sibling more authority than the others. However, this can backfire. Suddenly, many decisions need the sign off of every trustee. The administrative burden associated with managing each account, and each transaction, grows. While there are ways around this, it still can make things more complex than you intended.
Family and professional trustees can maximize flexibility
When drafting your documents, you really can’t be certain what the circumstances will be at the time you can no longer act. Is it a crisis where you suddenly die at a young age? Do you suffer from dementia and need assistance with paying bills and managing your financial affairs while you’re alive? Are you in your 90s and have a spouse who’s living but would struggle in the role of trustee? The best answer is often to build flexibility into your planning so decisions can be made in response to specific circumstances as they unfold.
If you’re considering a professional trustee somewhere in the line of succession, you may want to allow the family trustee the option of adding the professional trustee before the professional becomes the sole trustee. This can remove the administrative burden from family and provide flexibility if additional services are needed.
Another option: Professional trustee as agent
Another option is to hire a professional trustee to act as “agent.” If an individual has already been named and feels they don’t want to take on all the responsibility serving as trustee requires, they can get assistance by naming a professional as an agent.
An agent can take over many of the administrative aspects of trust management, leaving the bigger picture decisions to the trustee. This type of arrangement is handled using an outside agency agreement rather than the trust document itself. Trust documents for irrevocable trusts don’t always allow the trustee to appoint a professional co-trustee, but they can hire an agent.
Know how your trust is set up
We often find that clients don’t know how things tend to work holistically, and the reality differs from their expectations. They “thought” a professional trustee was named but didn’t realize it was only after all options had been exhausted. Or, they never realized that one child would be put in a precarious position, having to make a difficult decision regarding a sibling. They thought about their trust in terms of a long-term plan after they were gone but didn’t consider how it would be run if they were alive but incapacitated.
It’s difficult to anticipate all possible future scenarios at the time you’re drafting your trust. That’s why providing flexibility in your documents can often help you, your loved ones, and your advisors navigate the best path and course of action.
Our trust experts are happy to talk through your personal situation with you and help you understand the issues and make the right decisions for your family.
