Don’t leave a clueless trustee behind in your estate plan

The matriarch was the trustee of a living trust — a legal arrangement that had been established by the grantor, her husband and the father of the couple’s adult children. The goal was to protect assets and direct their eventual distribution to heirs, the trust’s beneficiaries.

Until his death, the patriarch had served as the trustee, the person in charge of fulfilling the trust’s provisions. When he died, his wife became the trustee.

A clueless trustee

Now that the wife has died, the role has fallen to an adult child. This person is stunned because no one had ever mentioned that he or she would eventually be saddled with this responsibility. The designated successor trustee was clueless because the grantor, the father, never brought it up, much less obtained consent.

In this all-too-common scenario, this news comes as a shock when successor trustees find out what’s involved. Living trusts often require trustees to work with financial professionals to manage assets and distribute investment income to beneficiaries, handle taxes and maintain or sell real property, among many other tasks.

This type of trust is not just for families with extreme wealth. Families of more modest wealth also can find them useful for tax- and estate-planning reasons. These trusts enable grantors to bequeath assets privately, and in some states avoid the public process of probate, which can be lengthy.

Family complications

Some heirs might not be happy with the choice of a successor trustee. They may lack confidence in that person’s ability or may be concerned about potential self-dealing.

Also, living trusts sometimes include special instructions regarding certain beneficiaries, intended to compensate for their lack of financial competence by controlling their spending. This can engender ill will among such beneficiaries toward the trustee, who is responsible for carrying out these instructions. Regardless, how much value the estate will ultimately hold for distribution to beneficiaries may depend, to some extent, on the trustee’s ability to do the job.

There’s an obvious way that grantors can avoid surprising the family with the choice of a successor trustee. But this is by no means easy because it requires a difficult conversation: Before completing trust documents, grantors should alert trustee candidates that they’re being considered for this role and get their consent.

All too often, the selection of a successor trustee is an afterthought. They just have their attorney insert the name into the trust documents at the end of the process without giving it much consideration. But it’s really one of the most important decisions that grantors face and should be considered carefully from the outset.

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Who is willing? Who is able?

Before trusts documents are completed, grantors need to think about who, among the potentially willing, would do the best job, what pertinent skills they may have or, if candidates lack those skills, who is a fast learner.

Another factor is location. If a candidate lives out of state, this could make serving in the role cumbersome. Yet, with the increasing convenience of sending documents online and signing them digitally, geography is less of a consideration than it used to be.

If a grantor has two grown children, the better choice for a successor trustee is the one with greater financial acumen. If no suitable candidates are able or willing to take the job, grantors may want to designate a professional trustee from a qualified financial firm. In some cases, this may be the best option, though some grantors may not fully trust a non-family member with this role.

In such cases, grantors may decide to designate a professional as co-trustee to work with a family member. One advantage of using a professional trustee is that it reduces the chance of lawsuits between heirs, which is not uncommon when an heir is the trustee.

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Myriad responsibilities

Once grantors decide on the best family candidate, a meeting with that person is in order — before naming them trustee in the estate documents — to discuss the duties involved. Depending on the size and complexity of an estate, duties might include these (among others):

• Preliminary duties. Locate and study the trust. Accept the role of trustee and notify the lawyer who wrote the trust, look for instructions about anatomical gifts and preferences regarding funeral/cremation and burial. Meet promptly with family and others concerned with the estate. Select legal, tax, accounting and investment advisors, and get a handle on investments held by the estate.

• Income taxes: Obtain copies of tax returns for the last three years. File decedent’s federal and state income taxes and pay any tax due, including local property tax. Determine whether the decedent took any required minimum distributions from individual retirement accounts.

• Safeguarding assets: Insure and protect real and personal property. Take possession of all valuables and keep them in a safe place. List essential details of the decedent’s business interests. Secure all financial records and obtain account passwords.

• Managing assets. Gather and list all assets, including those of investment accounts. Take possession of records of bank accounts, CDs, etc. Find out if the decedent had a safe deposit box; if so, locate it and take possession of its contents. Enter claims for any life insurance proceeds payable to the trust.

• Making payments. Pay all legacies and deliver specific bequests. Arrange for regular remittances to beneficiaries. Determine if minor beneficiaries need court-appointed guardians to receive distributions from assets.

• Estate and inheritance taxes. File federal and state estate tax returns, if required. Inform beneficiaries of income and deductions.

• State legal filings. File/record the trust with the appropriate state agency if state law requires. Coordinate with the executor to file will and probate documents, if necessary.

• Ongoing management. Develop a comprehensive investment policy statement for financial advisors to follow. Document beneficiaries’ needs, as listed in the trust’s documents. Provide detailed accountings to all involved.

• If a trust’s grantor is incapacitated (instead of deceased), coordinate health care with health care agent or appropriate family members. Obtain sworn statements of facts from attending and other physicians regarding capacity. Review bills and expenses for short-term needs.

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The proper approach

Once apprised of the extent and nature of trustee duties, candidates for the job can make a fully informed decision about whether to accept the role, defer to another family member or a close family friend, or whether to suggest that they serve as co-trustee with another family member or a professional.

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After obtaining this consent, grantors might want to hold a family meeting to announce the selection to get buy-in. Then would be the appropriate time to name the successor trustee in the trust documents.

This way, the family will know what to expect and the successor trustee won’t be shocked by finding out about this role while still in mourning.

David Robinson, a Certified Financial Planner, is a director and senior wealth advisor with Mariner Wealth Advisors in the firm’s Phoenix office. 

This article is reprinted by permission from NextAvenue.org, ©2024 Twin Cities Public Television, Inc. All rights reserved.