When families come in to meet with me for their free Personal Family Legal Session, one of the important things we discuss is how to choose a successor trustee, which is the person(s) or company that will administer the plan after the death or incapacity of the trust creator. Every family has a unique set of needs when passing on their legacy, and choosing the right successor trustee is an important part of your legal plan.
What is a Trust?
A trust is a legal document that details your wishes about the property held in the trust and how to distribute the property to your beneficiaries. Trusts avoid probate because they are private contracts that transfer ownership of your property so that the court does not have to after your death.
There are three parties in a trust:
- the person who creates the trust is called the trustor; (sometimes called grantor or settlor)
- the person managing the assets is called the trustee
- and the person entitled to receive the assets is called the beneficiary.
Usually, a person or married couple will serve in all three roles in their trust. They will make a trust (trustor) and manage it (trustee) for their own benefit (beneficiary). The successor trustee manages the trust after the creators of the trust become incapacitated or pass away.
Who are the Beneficiaries of the Trust?
Before you can find the right successor trustee you need to get a sense of what the job will entail. Children are the most common beneficiaries, but a two-year-old child and sixty-two-year-old adult usually have very different needs. It is the job of the successor trustee to manage the assets for the benefit of the beneficiaries, so it is important to consider the needs of the beneficiaries. The terms and conditions of the trust should protect the needs of the beneficiaries.
What are the Terms of the Trust?
A well-designed trust will have age restrictions so that a beneficiary under 18 years old will have a trustee manage the inherited assets until the beneficiary turns 18 and can open a bank account and manage the money themselves. Without a trust, a person under the age of 18 entitled to inherited money would have to have a person called a conservator appointed by a court. The child’s parent(s) are their legal guardian, but to collect money on the child’s behalf the parents would still need to be appointed by the court to act as conservators.
If the trust requires the trustee to manage the assets until the child reaches the age of thirty this will be a very different and much more extensive job for two-year-old child, then it would be for a sixty-two-year-old.
The stress and trauma of the loss of a loved one is hard enough and being forced to make important financial decisions during this time can often be too much of a burden for people. The wrong decision by a trustee can result in loss of trust assets, increased taxes, or even personal liability for improperly managing assets for a beneficiary. When a beneficiary is going to inherit a life-changing amount of money, we advise the creators of the trust to consider naming an independent trustee for two years. This allows beneficiaries of any age time to grieve and to be able to get some guidance from the trustee and time to learn how to manage the trust to maximize protection and minimize taxes.
Trustee Qualifications and Preferences
The trustee should be a person(s) or company that:
Choose someone you know will make sound financial decisions for your beneficiaries.
Has the Ability to Serve
Choose someone who has the emotional and intellectual capacity to serve. They also must be over 18 years of age.
Has the Time to Serve
Choose someone who has the time meet with an attorney and properly administer the estate after you pass, and the time to advise and negotiate spending decisions with the beneficiaries until the beneficiary control the inheritance.
Is Reasonably Priced
All trustees are entitled to reasonable compensation, whether it be a family member, friend, or company. When appointing a person, make sure they know they are entitled to reasonable compensation and if appointing a company, ask to see their schedule of fees.
Is Naming Co-Trustees a Good Idea?
A co-trustee is when two or more people or companies together to serve to manage the assets in the trust. This means they will each have to agree and work together to make decisions. I usually advise against co-trustees since it can create problems if the co-trustees cannot reach an agreement on how to manage the trust assets. If considering co-trustees, ask yourself, “Do the people know each other and will they be able to work together?” I often see blended families name a child from each partner to serve as co-trustee as an attempt to balance the interests of the blended family. Sometimes it works well; other times it does not work well. With co-trustees the administration can end up being more time consuming and costly.
Who is the Preferred Trustee?
The preferred choice to serve as successor trustee depends on the complexity required in the management of the trust. If management of trust assets is desired, then consider the relationship of the person to the beneficiary.
The beneficiaries of the trust may be a good choice if they are adults and capable of managing the money and trust assets. However, being the trustee can create tension in relationships when the beneficiary of the trust wants money from the trust and the trustee has to say yes or no according to the terms and conditions of the trust. In these cases, a sibling or close family member may not be the best choice to serve as trustee.
You can also choose a company to serve as the trustee. This can help to ease family tensions, especially if there is a life-changing amount of money to be inherited. A company is also a good option for individuals who don’t have children or want to leave their estate to charity.
Consider the following types of companies to find your successor trustee:
- Financial institutions where you bank and invest your money
- CPA and income tax advisors
- Legal advisors
At Dana and Associates we offer a free Personal Family Legal Session to evaluate your estate planning needs and help you choose the right trustee! Call us at 480-924-4424 to find out more about our fiduciary services and to review our fee schedule.