Issues to Consider in Nominating a Successor Trustee
This is generally one of the most difficult decisions for clients to make next to deciding who should be nominated as guardian of their minor children. The successor trustee is the person (or persons) who shall hold, manage, invest and reinvest the trust assets, collect the income and profits from it, pay the necessary expenses of trust administration, and distribute assets as instructed in the Trust Agreement when the original trustees (the clients) are unable due to incapacity or death. The primary responsibility of the successor trustee is to ensure that the instructions in the trust are followed for the benefit of the beneficiaries. The person or people chosen should be trustworthy, good at following instructions and carrying out tasks, organized, and willing to seek out professional assistance when necessary.
Often times nominating a friend or family member is the most popular choice. The benefits of this type of individual are trust, personal attention, and lower trustee fees. Clients implicitly trust those individuals they nominate if it is someone they know personally. They also feel like their beneficiaries will receive more personal attention from the trustee if it is a friend or family member. Finally, individual trustees may or may not decide to charge for their services therefore the overall cost of administration of the trust may be lower. The potential disadvantages are that the individual nominated may not be qualified, willing, or available to carry out their duties as trustee. Also, if the trustee does decide to run off with the funds or is simply incompetent, there is no insurance in place to secure the trust assets (unless the trust instructions require a bond which is very rare).
Selecting a financial institution such as a bank to serve as trustee is another option. Most major financial institutions have trust companies that are capable and qualified to serve as successor trustees. The benefits of using a financial institution are knowledge and expertise as well as protection of the funds. However, the drawbacks include higher trustee fees (generally charged as a percentage of the assets and start upwards of 1%), and more impersonal service. For trust instructions which allow for substantial discretion in distribution of the funds to the beneficiary, the impersonal nature of a professional successor trustee maybe detrimental. The trustee will not personally know the beneficiary. Depending on the circumstances, this maybe a good or bad thing.
Finally, there also licensed professional individual fiduciaries that can be nominated to serve as successor trustee. The potential advantages of this option over a financial institution are more personal service and lower fees (they generally change an hourly rate). However, if an individual fiduciary is named in the trust documents, there is a possibility that the individual may not be available to serve at the time they are needed. There is less likelihood that a financial institution would not be available to serve.
One last consideration in nominating a successor trustee is how many to nominate. Generally, I advise that clients pick a primary successor trustee and at least one alternate in case the first choice is unavailable or unwilling to serve. However, I have many clients who would like to name all of their adult children to serve as successor trustee together. It is possible to name co-trustees however, in my experience this can create potential for conflict and inefficiency in the administration of the trust. For example, John Smith names all three of his children (Amy, Susie, and Mark) to serve as co-trustees. John dies. Amy, Susie, and Mark cannot agree upon whether John’s home held in the name of the trust should be sold. John wants to keep the home as investment property. Susie and Amy want the home sold immediately so they can each receive their share of the proceeds. John would like to buy out Susie and Amy but cannot afford to do so. Amy wants to liquidate the investment account while Susie would like to keep it intact. This type of disagreement over how the assets should be handled can not only delay administration of the trust but also create disharmony among the family members. Also many financial institutions will not honor a requirement for multiple trustee signatures. Therefore, I will advise against clients choosing co-trustees unless they can make a good argument as to why they are necessary.
While choosing a successor trustee can be a difficult and personal decision, it is crucial. Clients benefit from knowing their options and receiving good advice from their estate planning attorney. It is also imperative that this decision be revisited and updated on a consistent basis.