Put Your Plan in Order. Part 5: Trust Planning - Should You Appoint an Independent Trustee?

Put Your Plan in Order. Part 5: Trust Planning - Should You Appoint an Independent Trustee?

Like most attorneys, I was taught Estate Planning either by direct tutoring from my partners or by the traditions of those attorneys teaching seminars and speaking in related educational-type programs. The answer to the question of who should serve as a successor trustee in a trust for the individuals forming the trust (trust makers) is almost always an afterthought – it defaults to the kids, of course.

Parents hand out nominations of successor trustee to children and other family members as if they were a prize. While the nomination is certainly honorable, as estate planning attorneys, we should look beyond the “feel-good moment” and counsel the client about the real impact that nominating children or close family members as trustees after the death of both trust makers may have on the nominated trustee’s life.

Nominating Successor Trustees to Act When Mom or Dad Is Alive but Disabled

Family members may be excellent candidates to serve as co-trustees or successor trustees when a trust maker is alive and perhaps incapacitated, but not able to handle his/her own affairs. But the job is entirely different after the death of either trust maker (or the sole trust maker in the case of a single person trust).

I am at a point in my practice where I am now helping my clients administer trusts following the death of the second trust maker. And I am discovering that many of the basic assumptions I made about the logic of having close family members serve as successor trustee after death were flawed.

While a parent is alive, relationships between family members maintain some basic consistencies. Though individual relationships are fluid, immediate family members interact in a manner that is generally predictable and stable while the parents are alive. After the death of the first trust maker (parent), the relationships change. Sometimes the relationships grow closer, and sometimes they suffer. But as long as one trust maker is living, the relationships usually survive.

Nominating Successor Trustees After Death of Trust Makers

The story changes upon the death of both trust makers. Once both parents are gone, some of the glue that held everyone together dissolves. Deep-seated resentment between children seems to surface.

Consider, for instance, a typical brother-and-sister relationship where one has “jokingly” told the other “Mom always loved you more.” When Mom is no longer there, these deep-seated notions oftentimes rise to the surface and become real. Add to the mix the spouse of a child who doesn’t like a particular sibling, and the stress of the relationship can reach a breaking point.

For many years I have heard these stories from other attorneys, but they never seemed relevant to my clients. How wrong I was! First I was annoyed, then surprised and finally shocked to find out that fighting between siblings after the death of the parents is almost universal.

What You Are Asking a Child Successor Trustee to Do

When a client suggests that a child should serve in this capacity, I point out all of the following:

You asking your child to perform a full-time job with part-time hours, because he/she has a life and a job he/she is trying to live.

You are asking your child to invest a substantial amount of time and effort to perform these duties free of charge. While I have yet to read a trust that does not specifically provide for the payment of trustee fees, the fact is that when a child or close family member is administering a trust for the benefit of siblings, rarely do they ever take any fees. And if they do, they are often criticized by their siblings for doing so.

You are asking your child to do a job he/she has never done before, and it does not come with an instruction manual. We attorneys are here to help, but generally individual trustees do not seek legal help until they encounter a problem they cannot solve for themselves. It is only when they learn they have failed to perform many of the statutorily required duties that all trustees need to perform that they seek legal assistance.

Finally, if your child makes a mistake, he/she is personally liable to the estate and the beneficiaries for any deficiencies.

I then ask my clients, “If your child were sitting here with us, do you think he/she would volunteer for this job?” Predictably, almost all of my clients quickly concede that naming a child or loved one to take care of their estate after both of them have passed away is a bad idea. The next question posed by the clients is, “Then who?”

Independent Trustees Are the Best Solution

The simple answer is appointing an independent trustee to serve during administration of the trust after the death of both the trust makers (parents) and until the trust shares are established for the kids or the estate is distributed outright. The advantage to the trust makers is that they can avoid having a loved one do the work, and they can have some assurance that the trust will be administered precisely as drafted.

Once again, a very common problem with having loved ones administer trusts is that they often do what they believe they should do instead of what the trust actually prescribes. Independent trustees do no more and no less than what is actually set forth in the trust instrument.

Most clients are worried that if they nominate a professional trustee, the beneficiaries will be stuck with that trustee. This concern is quickly resolved once the client is introduced to and understands the office of the trust protector. A trust protector is an individual who can be appointed by the trust maker to oversee any disputes or claims between a beneficiary and the successor trustee, and often has the power to remove a successor trustee if necessary. I tell my clients I would not recommend using an independent trustee unless they also use a trust protector.

Lastly, and most important, clients will always ask, “How much will it cost?” Costs vary, but the trust company I often use estimates the cost of administration of a standard trust to be between $5,000 and $10,000. I point out to clients that even for small estates, this is a very reasonable fee, and the cost will have little effect on how much the beneficiaries ultimately receive. Most important, beneficiaries can avoid having to serve as trustee.

I find that once clients see the big picture, they are relieved and even excited to nominate an independent trustee to serve after the second death.

Conclusion

While many of my clients have named adult children as successor trustee or co-successor trustees, and those scenarios are not fatal, a client with any type of complexity to their estate plan – such as owning a business, numerous parcels of real estate or other complicating factors – should consider appointing an independent corporate trustee to handle their affairs in the event of their death.