03/26/2012

Selecting a Successor Trustee

There are different issues depending on the type of trust and relationships between trustees and beneficiaries.  It is important to think through the consequences of who will be the successor.

In the case of a Revocable Living Trust, usually the person establishing the trust (the grantor) serves as the trustee.  If the grantor is married, husband and wife may have one joint family trust or two individual trusts.  In either case, they are usually co-trustees, and one can serve alone if the other is unavailable or unable. 

Issues may begin to come up at the death of the first spouse.  The deceased spouse’s trust becomes irrevocable, with marital deduction planning resulting in the maximum estate tax exemption being used.  The income from the deceased spouse’s trust is available to support the survivor, limited to providing for health, education, maintenance and support to avoid having the assets included in the survivor’s estate.  Trust principal is available to provide that specific support, but naming an independent trustee would create the means for granting greater access to principal.

Second marriages provide some sticky planning issues regarding trustees.  A common estate planning technique for a spouse with children from a prior marriage is to give the surviving spouse the use of the trust funds for life, with the remaining assets passing to the children.  Who is the trustee?  The surviving spouse who may spend the assets?  One of the children who sees the responsibility of the trustee to limit the amount spent so that the maximum passes to the future beneficiaries?  Close friends can be called on to serve as an independent trustee, but contention among current and future beneficiaries may result in the trustee resigning to avoid the grief and possible disruption to family friendships.

Corporate trustees, whether a trusted CPA, an attorney, a bank or a trust company, can sometimes be a better solution.  They can monitor investments to ensure they are properly invested for current and future beneficiaries, and they can say no to requests for funds that are either imprudent or restrictions not allowed under the terms of the trust. 

Irrevocable trusts are frequently structured as a means of removing assets from the grantor’s estate for estate tax purposes.  A grantor may not serve as trustee and still expect the trust assets to be excluded from his estate.  In this case, the issue is  selecting the trustee not the successor.  Someone else will be trustee, but the grantor can sometimes serve as investment manager for trust assets. 

Special or Supplemental Needs Trusts (SNT) pose another set of issues.  These trusts are intended to benefit someone eligible for government benefits by reason of a disability.  It is important that the beneficiary not have any independent access to principal, and that the trustee know the limits of how the trust funds can be used to support the beneficiary.  The grantor of a SNT, frequently a parent who wants to provide for a disabled child into the future, usually serves as the initial trustee.  In selecting a successor trustee, it may be natural to opt for one of the other children, and that should be done only after careful consideration.  It may be better to select a corporate trustee rather than having a sibling take on the duties.    

 

Law Office of Eileen Guerin Swicker 20 W. Market St. Suite E, Leesburg, VA 20176

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