A trust is a written agreement between a grantor, the person who establishes the trust, and the trustee appointed to manage and administer it. In a revocable living trust, the grantor will typically also serve as the initial trustee. A grantor will name a successor trustee to manage the trust when they can no longer do so, such as during a period of disability or after death.
Grantors put much thought into whom they choose as their successor trustees as they will manage the property, accounts, and money in the trust. The grantor chooses someone they trust implicitly. The successor trustee should be organized, responsible, transparent, and meticulous in their work and be able to follow the trust instructions even when under pressure from disputing family members.
Even the most well-intentioned successor trustee might find the role overwhelming, especially if they lack the background and skills to manage the trust accounts and property.
Mistake #1: Faulty Record Keeping
Impeccable record-keeping is essential to ensure that the trustee’s actions are not open for a challenge, leading to lengthy and expensive court battles. Accurate, detailed records should be kept of all income coming into the trust, actions taken with trust assets, and all distributions made. These records should be open and transparent. The trustee should send reports on the trust activity to the beneficiaries and heirs. If the successor trustee lacks these record-keeping skills, hiring an accountant to assist the successor trustee can be a great strategy to prevent problems before they might occur.
Mistake #2: Misalignment of Responsibilities
The trust is set up and funded by the grantor, but it is for the beneficiaries’ benefit. The trustee has a fiduciary responsibility to act in the best interest of the beneficiaries, not the grantor, but must also follow the trust instructions for how to do so. The successor trustee must clearly understand whom they have a fiduciary responsibility to and how actions that are not aligned with this duty to protect the beneficiaries’ best interests can lead to legal liability if bad investment choices are made.
Mistake #3: Not Being a Team Player
The successor trustee has the key role of managing and administering the trust, but this should be done in concert with key financial team members. Going it alone can lead to inaccuracies, misunderstandings, and significant preventable financial losses. Organizing a team meeting early in the process can provide an opportunity to introduce the successor trustee to your estate attorney, certified public accountant, financial planners, and other members of your estate planning team.
Mistake #4: Not Discussing Compensation
A successor trustee’s role, just like any other job, takes time and requires specific skills. It’s challenging to discuss financial compensation for this role, especially if the trustee is a close friend or family member. A failure to do so can lead to a build-up of resentment or a loss of morale as the trustee invests uncompensated time and effort in meeting their obligations. Handle the compensation discussion as you would for a colleague or employee. Be open, fair, as generous as you deem necessary, and put the compensation terms in writing.
Mistake #5: Not Staying Objective and Impartial
Frequently, the successor trustee is a trusted friend or family member. Choosing someone in the family helps to ensure that the family’s financial matters remain private. However, even in the most close-knit families, there are likely to be disagreements and disputes, especially with money. In this situation, it can be challenging for the trustee to remain neutral. If they cannot do so, family members will perceive the decisions as unfair and inconsistent with the grantor’s intentions. Hiring a corporate trustee may be an option to ensure that the trustee can remain neutral, as they would have no emotional connection to anyone in the family.
Choosing a successor trustee who will be unwavering in following the trust instructions, act as a team player, and make decisions in the best interests of all beneficiaries can be hard. If you need help naming a successor trustee, we can provide insight and clarification to help you feel that you have explored the potential pitfalls and have made an ideal trustee choice.