Estate planning clients often report that selecting trusted individuals to serve in various roles under estate planning documents is the trickiest part.
Selecting a “trustee” of a trust is no exception and is a decision with huge consequences.
The “trustee” of the trust is the person who controls the trust, manages its holdings, supervises distributions, and ensures that the trust’s terms are fulfilled.
Often, the estate planning client himself/herself is the initial trustee of a “living trust” or a “revocable trust”. For these types of trusts, the selection of the “successor trustee” – the person who would serve as trustee if the estate planning client (the “settlor”) were unable to serve – is the big decision.
For certain types of irrevocable trusts, the settlor himself/herself is ineligible to serve as the trustee of the trust. Here, the selection of the initial trustee is the big decision.
As you consider who you will ultimately select to be a trustee of your trust, here are five considerations to aid you:
1. No Matter What, It’s Going To Be A Big Ask
Even in the case of a well-funded, well-drafted trust that is drafted to wind up and distribute its assets to designated beneficiaries promptly after the settlor’s death, the trustee will have significant obligations.
At a minimum, the trustee will likely need to coordinate with an attorney, a CPA, and likely an investment advisor with respect to fulfilling the tax and legal obligations required of the trust.
The trustee will need to report and communicate to the beneficiaries of the trust.
The trustee will be charged with gathering trust assets, sometimes establishing new trust accounts under new tax identification numbers.
If the trust is not drafted to wind up and distribute its assets promptly after the settlor’s death, and instead is drafted to hold assets for a beneficiary for a prolonged period, the job of trustee will be even bigger. Annual tax filings for the trust will be required. The trustee will be called upon to account to beneficiaries and respond to distribution requests.
We encourage clients to select somebody as trustee who will not be overwhelmed by the situation. Can the person you are selecting as trustee keep a level head, even in a time of great sadness and uncertainty? Is the person you are selecting as trustee accustomed to working with professionals and dealing with financial and legal issues? If the person you are considering as trustee does not have this kind of background, would they be intimidated if they were suddenly called upon to tackle these issues?
2. Are You Complicating A Family Relationship With New Roles?
It can be tempting for clients who establish a trust to hold a child’s inheritance to select another child (the beneficiary’s sibling) to serve as trustee of the trust.
This is perfectly logical to clients. Who else in the world would be more invested in protecting a child’s inheritance than his/her sibling?
That’s not how the client’s child might see it. The child might now see the sibling as standing between them and “their money”. Depending upon how the trust is drafted, the child might have to share financial information with their sibling when requesting distributions from the trust.
Every family is different, and in some families, there is nobody better suited to serve as trustee of a child’s trust than his/her sibling. However, for some families, introducing this new dynamic into the sibling relationship can be a fracture point.
3. Does A Family Member Have To Serve Or Can It Be A Professional?
The short answer is that there are “professional trustees” whom you might be able to call upon as a trustee. Some attorneys serve in this role (often called a “corporate trustee”), but more commonly, banks and trust companies provide these types of fiduciary services.
There are several advantages to selecting a corporate trustee. Unlike an individual trustee who might age, move away, or face other life circumstances rendering them unable to serve, the corporate trustee will more reliably be there. Moreover, unlike an individual trustee who may have to spend the holidays or a vacation with the beneficiary of the trust, the corporate trustee will not be concerned about inserting a fiduciary relationship into a family relationship.
Clients do report some downsides from corporate trustees. First, some corporate trustees maintain a minimum trust value below which they will not agree to serve as trustee. It can be difficult for the client who is planning a more modest trust for a beneficiary to find a corporate trustee. Additionally, some beneficiaries do report corporate trustees as occasionally being slower to respond to distribution requests than family members. However, most corporate trustees have a dedicated trust officer on each trust, serving as the direct and readily available point of contact for the trust’s beneficiaries.
4. You Can Change Your Mind – Sometimes More Easily Than Others.
The person you select as trustee today does not necessarily bind you to that selection forever.
In the case of a “living trust” or a “revocable trust”, so long as you remain of sound mind, you can amend your trust and modify who you have nominated as a successor trustee.
Even in the case of an “irrevocable trust”, the term nominating a trustee can often be modified. Under Maryland and District of Columbia law, administrative provisions of irrevocable trusts (such as the appointment of a trustee) may be amended by a “non-judicial settlement agreement”. This is an agreement to modify a trust provision that must be signed by all beneficiaries of the trust (both current and next-level beneficiaries). Therefore, unlike the case of a “living trust” where a client can privately modify a trustee appointment, in the case of an “irrevocable trust”, although a trustee appointment can be modified, it is only with the participation of the beneficiaries.
5. The Trustee Still Must Accept The Nomination When The Time Comes
Clients should remember that the nomination of a trustee in their trust instrument is merely that – a nomination.
A nominated trustee is under no obligation to accept the appointment when called upon to begin their service as a trustee.
Therefore, it is prudent to consult with an individual or institution prior to naming them as a trustee (individual or corporate) within your trust.
At Bulman Dunie, our goal is to help clients go beyond the simple questions of who will inherit and in what proportions, but to tackle the more pragmatic questions to make sure that the estate plan works efficiently. How can we help you? Reach out to practice chair Jeremy Rachlin at jrachlin@bulmandunie.com or associate attorney Liz Farley at lfarley@bulmandunie.com and let us guide you.
