Most couples who create trusts choose one or more of their children, or other close relatives or friends, to serve as their successor trustee or trustees. Usually that works out just fine. But the successor trustee’s role is unfamiliar to most of us and can be quite difficult.
A typical joint revocable trust is virtually invisible upon creation. As long as Mom and Dad are the settlors (i.e., creators), trustees, and sole current beneficiaries of their trust, there is no practical change in how they manage their financial affairs. They can spend trust assets as they choose and need not account to the trust’s beneficiaries.
The situation changes when Mom or Dad dies. The trust document often calls for the decedent’s separate property and share of community property to be held in trust to benefit the survivor during her lifetime, with the remainder to the children. The surviving spouse usually must value and segregate the decedent’s share of their property and then follow limitations in the trust document with regard to spending those assets.
When conflict erupts, it usually occurs after Mom and Dad are deceased. This is when the successor trustee has taken control of trust administration. Presto! The successor trustee who has a sibling relationship with her brothers and sisters all of a sudden also becomes their fiduciary with the attendant duties of care and loyalty.
While Mom and Dad happily may have allowed their daughter to harvest and sell the walnuts in the orchard, or to live at the ranch house rent-free, her siblings may fault her for self-dealing if she continues that practice after she becomes trustee. What was once acceptable may become self-dealing.
The successor trustee must administer the trust according to the terms of the trust documents and the governing law. Thus, the trustee should read and periodically review the trust documents to make sure she is acting within their scope. The key is how Mom and Dad articulated their intent in the documents that they signed – successor trustees sometimes stray by acting based on what they believe their parents wanted rather than on what the documents actually say.
Successor trustees also must understand, however, that that law sometimes overrides the trust documents. For example, the documents may on their face excuse the trustee from liability for any error, but the trustee (under the California Probate Code) will still be liable for gross negligence or intentional misconduct. Likewise, even if the trust states that the trustee has unfettered discretion, the law still requires the trustee to act reasonably.
The successor trustee must manage assets under the Uniform Prudent Investor Act. If Mom and Dad were heavily invested in a favorite stock, the law may require the successor trustee to diversify the trust’s assets within a reasonable time after taking over as trustee. Consulting a professional investment advisor may be necessary if the assets will be kept in trust for a while. The advisor can help the trustee craft and implement an investment plan consistent with the purposes, terms and distribution requirements of the trust.
Sometimes the trustee will have discretion to make distributions to beneficiaries for their health, education, maintenance or support. Is it appropriate to make a discretionary distribution to cover the cost of cosmetic surgery? The trustee will need to collect enough information to exercise sound discretion and then preserve a record of that decision.
The successor trustee must keep the beneficiaries reasonably informed regarding trust administration. More specifically, the trustee must provide a detailed accounting to beneficiaries at least once a year (though in practice accountings may be less frequent) and must respond to beneficiary requests for information or documents. The trustee likely will need help from an accountant with regard to trust accountings and tax reporting.
Transparency and disclosure help maintain positive relations between trustee and beneficiaries. Also, the three-year statute of limitations for breach of trust claims generally does not start until beneficiaries have received information from the trustee.
Unless the trust says otherwise, a trustee is entitled to charge a reasonable fee for her services. A trustee should keep detailed time records, day by day, of the hours spent and tasks performed. Fees may cause friction with beneficiaries who do not understand the work involved or think the trustee should volunteer. The trustee may ultimately opt to waive her fee, but that is a decision that is best made towards the end of trust administration.
An attorney can play a key role in helping a successor trustee administer a trust, and trustees usually may hire counsel and pay reasonable legal expenses from trust assets. In some situations, however, the prudent trustee may decide to use her own personal funds to seek legal advice. To the extent the trustee uses trust assets to pay for legal or other expenses, the beneficiaries may contest the propriety and/or amount of the expenditures.
In sum, most successor trustees are able to complete trust administration without problems. However, it’s not easy to serve as successor trustee, and it can be downright difficult when trust terms or assets are complex, or when there is tension among the beneficiaries. To smooth administration, Mom and Dad might opt to name a third party professional to act as successor trustee, or the family member selected to serve as trustee may choose to step aside in favor of a professional.
Note: The general discussion above may not apply to your particular situation. Before taking any action, you should consult with an attorney who is licensed to practice law in your jurisdiction.
© 2011 Downey Brand LLP.