The coronavirus pandemic revealed short-comings in many estate plans, especially in trusts. Be sure any trusts in your estate plan will stand up over the long term and meet your goals.News reports indicate more people realize the importance of an up-to-date estate plan. They’re flocking to estate planners. Unfortunately, many of these people will receive commoditized, or cookie-cutter, estate plans that will repeat some widespread errors.
Key mistakes in many plans revolve around the choice of trustee and the trustee’s duties. More precisely, the critical point in an estate plan is when it is time for a successor trustee to take over.The trust creator usually is the initial trustee of a revocable living trust and many other types of trusts. The question that sinks many estate plans is: Who takes over when the original trustee is disabled or has passed away?
The fundamental element that many estate plans don’t have regarding successor trustees is flexibility. Most plans simply name a specific individual, such as the oldest adult child, as the successor trustee.
Such a choice often overlooks whether the person is qualified and interested in doing the job properly. More importantly, even when the named person is the logical choice, standard trust agreements assume the person will be alive and able to take on the role when needed. That often is not the case.
Also, both the trust creator and the other beneficiaries of the trust are likely to have changing views in the future of what their needs are, what the trustee’s important duties will be and who should serve as trustee.
Relationships also can change.If there is an obvious choice as successor trustee, of course, name that person in the trust agreement. But the agreement needs to contemplate alternatives and have some flexibility.Instead of lists of potential successor trustees, consider establishing a process through which a successor will be named. In some plans, the surviving spouse or a sibling of the trust creator selects the successor. In other plans, the beneficiaries choose the successor trustee. That might not be feasible if multiple beneficiaries have to agree, depending on the people involved. It can be feasible when the trust splits into separate trusts for each beneficiary.
Some trusts name a trust protector or director and empower that person to choose the successor. This person often is a legal or financial professional, such as the trust creator’s attorney or accountant. A trust protector or director often is also authorized to change the trustee at any time. Two or more people can fill this role jointly.There is no universally ideal option.
Family dynamics are an important consideration. Each plan, however, must be crafted with the understanding that different scenarios for the future are possible and there needs to be some flexibility in how the successor trustee is determined. Your estate planner’s in-sight and experience should help guide you to the best choice for your trust.
Another key to the long-term success of a trust is to recognize that you don’t have to concentrate all the trustee’s duties and responsibilities in one person. A trustee decides how trust assets will be distributed to the beneficiaries. The trustee also manages the assets, which usually are investments. In addition, the trustee must maintain the books and records, administer the trust and file tax returns.These duties are very different, and some require special knowledge or expertise.
That’s why many trusts now provide for co-trustees, each with different duties and responsibilities.For example, a corporate trustee such as a bank or trust company can be named to be the administrative trustee. This trustee handles the books and re-cords and also has custody of the assets.
The administrative trustee also prepares the tax returns and handles other regulatory and communications tasks.Some people name their certified public accountant (CPA) as administrative trustee, depending on the type of assets held in the trust.Another role is the investment trustee. A financial planner or investment firm often is named to this role. Obviously, this trustee oversees investing and managing the trust assets and will do so for a fee.
Most corporate trustees are able and willing to perform both the investment and administrative trustee roles. You might want to separate the two roles so that the investment trustee is selected solely for investment acumen.
Also, initially separating the roles makes it easier to change the investment trustee when investment performance isn’t satisfactory. Some trusts hold special or unique assets, such as a small business, investment real estate, or a valuable collection. A special trustee might be named solely to manage such assets.
A third role is the distribution trustee. When the trust agreement gives the trustee some discretion over the amount and timing of distributions to beneficiaries (and most do), a distribution trustee might be desirable.The ideal distribution trustee is someone who knows the family (or other beneficiaries) well and also knows the trust creator well enough to have a good idea of what would be intended in different situations.
Corporate trustees aren’t likely to know family members well enough to do a good job with discretionary distributions. Some trust creators think they can provide a detailed set of rules concerning future distributions. But you can’t anticipate all the circumstances that will occur in the future. When there are firm, unchangeable distribution rules in a trust, often unexpected situations occur. The rules cause results the trust creator probably wouldn’t have wanted. Many trusts have two types of discretionary distributions.
One type is to allow distributions for the health, education, support and maintenance of the beneficiaries. It is reasonable for one or more beneficiaries also to serve as the trustee who determines these types of distributions.Many trusts allow additional distributions to be made at the discretion of the trustee without a firm standard.
Usually, the trustee can make distributions that are “in the best interests of the beneficiary.” It is best that someone who is not a beneficiary of the trust should have this role. Again, multiple people can serve as co-trustees.
Most state laws allow trustee duties to be separated and provide that a trustee with one set of duties won’t be liable for improper actions of a trustee with other duties. The trust agreement needs to define the different duties and how the different trustees will be selected.
When significant assets are involved, it is becoming more common to have an outside trust director or trust protector to oversee the trustees and change a trustee when needed.
The trustee and successor trustee is one of the most important decisions in estate planning. Don’t be among the many people who don’t give it enough consideration.