How should I choose the successor trustee for my living trust? Should I name more than one trustee for my trust? Are co-trustees or joint trustees a bad idea? Should I choose my oldest child to be my trustee? What are common mistakes in choosing a trustee? How do I appoint a trust successor? Who should be my trustee after I die? Are there professional trustees available?
By James L. Cunningham Jr., Attorney-at-Law
(Adapted from the book, Savvy Estate Planning)
One of the most important decisions you will make when you plan your estate is not “what” or “how” but “who.” Who will you choose as successor trustee of your revocable living trust? If you are married, the first successor trustee will likely be your spouse. But what about when you both pass away? Who will be responsible for the administration of your trust? Who will divide your assets fairly? Avoid arguments? Guard your assets wisely? Let’s look at the issues around the appointment of a successor trustee.
You may also wish to view my webinar on choosing and educating your trustees–and I invite you contact my office for comprehensive Estate Planning in California.
Executor vs Trustee: What Is the Difference?
People often confuse the roles of trustee and executor in an estate plan. If you have a properly executed trust, then the person with the authority and responsibility to administer your trust (and only your trust) is the trustee. The executor is the person with the responsibility and authority to execute your will (and only your will). The Army has soldiers, and the Navy has sailors – similar roles, different names. It’s the same with a successor trustee vs an executor.
Ideally, a trust will be the foundation of your estate plan where many, but not all, assets accumulate. Your IRA, 401(k), TSA, Annuity, and Life Insurance typically stay out of your living trust. The trustee can take control of them on behalf of your beneficiaries. With a living trust, you will also have a “pour-over will” which moves certain types of assets into the trust when you die, if those assets are not already in the trust.
It’s the responsibility of the executor of the pour-over will to make sure that the proper assets get moved into your living trust. And usually, if you have a living trust, you will designate the same person to act both as trustee and executor of the pour-over will. Both of these people should know that even in well-constructed estate plans, a probate process may still be required to move some assets into the living trust.
Should I Appoint the Same Person as Executor and Trustee?
Maybe and maybe not. In some cases, it may be best to have a different person as the executor of your will and trustee of your living trust. That’s a decision to make with a qualified attorney. But essentially, when comparing a successor trustee vs an executor, know that one exclusively handles the administration of your trust while the other is responsible for executing your will.
What Are My Options in Naming a Successor Trustee for My Estate?
These are five basic options to consider when you name a successor trustee for you or you and your spouse:
- A single individual, such as a highly-responsible adult child
- Two co-trustees or even multiple trustees who get along extremely well
If you name family members or other non-professionals as trustees, you should strongly suggest they engage a trust administration law firm such as mine to help them with the legal and accounting issues.
Then there are the professional options:
- A Private Professional Fiduciary
- A Trust Bank
- A Trust Company
Let’s look at the pros and cons of these options—starting with a reminder that whatever choice you make, you should revisit that choice frequently as people and circumstances change greatly over time.
You will also need to name backup options (second successor, third successor, etc) if any of your first choices declines the job or is unable to serve.
Many People Don’t Give Enough Thought to Choosing a Trustee
How should you choose a trustee? What process should you follow to pick a candidate for a job which involves the proper handling of attorneys, bank officers, gun collections, and possibly millions of dollars?
Usually, mom and dad sit in the attorney’s office and when the attorney asks who mom and dad want to name as their successor trustee (when mom and dad can’t serve) they get a blank look on their faces and ask the attorney what they should do. Who should they choose to execute their will and trust when they fall ill or pass away?
“It’s up to you,” says the attorney.
“Well, I don’t know,” says Dad. “Of the three kids, Johnny’s the oldest. We’ll pick him as trustee. It should be the oldest, right? As an honor?”
Too often, the attorney simply nods, prepares documents, mom and dad sign, and the papers are filed away in mom and dad’s drawer for thirty years—to be pulled out only when both of them have died.
Well, Johnny was a great guy at twenty-one, but will he be the right person to manage an estate as trustee at fifty-one? Does he have the time, the drive, and the integrity to do this right?
Thirty years later, maybe Johnny himself isn’t so sure. Maybe Johnny has grown into a super-busy businessman with little time or interest in managing his parents’ trust and wrangling with siblings.
Or, maybe Johnny now lives on a fishing boat somewhere in Tampa Bay, hates paperwork, and doesn’t own a phone. He may be hard to find. And when he’s found, he may be exactly the wrong person for the job.
Joint or Co-Trustees Can Be a Bad Idea
Then again, back at the lawyer’s office thirty years earlier, maybe mom and dad just couldn’t decide. Maybe they didn’t want to make any of their kids angry, so Mom said, “I know, let’s name all three of the kids as joint trustees!”
Now, all these years later, when the three kids are middle-aged, they have a serious problem. Now they see each other as three cooks in the same, ugly kitchen.
Johnny and Eddie never agree, so Lisa usually has the veto, and she usually goes with Eddie. Anger frequently flares, and it’s not really the kids’ fault. Anytime you have more than one trustee, it’s tough to make any big decision. Even tougher to see the decision through.
Should Johnny, Eddie, and Lisa sell the family land in Hawaii to a developer? With only one trustee, a decision can be fast. But with three, things often get complicated and stay complicated.
Say that Eddie and Lisa agree to sell. As a majority, they sign the papers, and the process of the sale begins. But Johnny hates the idea of cutting down all those coconut trees and refuses to sign. The company buying the land gets nervous. Sure, they’ve won a majority vote among the trustees, but what if that one rogue trustee goes off and does something to block the sale down the line? The buyers may think, “Unless all three trustees sign off, we’d better look elsewhere.”
A good attorney might have advised mom and dad to choose a single trustee—sometimes two if they get along.
And a really good attorney would have advised them to update their estate plan as their kids grew and their circumstances changed. That one cozy kitchen-table session just wasn’t enough.
Should You Choose a Trustee with Experience?
When people sit down to choose a trustee, they must sometimes choose between a family member with no experience and a family member who has administered a trust before. Both situations may present an issue.
Someone who has never administered a trust may be starting blind. But someone who has done it before may be burned out. Here’s a common situation:
Mom and dad sit down at the attorney’s office to get their estate plan in order, and Mom says, “Well, my sister was the trustee for my mother, and she was the trustee for both my brothers’ estates. She’s done this three or four times, so she’s an expert by now. I want to name her.”
Well, she’d better check with her sister, because her sister may not want the job. I have plenty of clients who come in and say, “Darn it (or a much stronger expletive), this is the fifth trust I’m going to have to administer, and everyone keeps naming me because I’m the person in the family who apparently does all of this. Well, sorry, I don’t want to do trust administration anymore. It’s a pain in the ass. I don’t want to spend the final years of my life handling everyone else’s estates. I’d rather garden. Or head off on a cruise. Or just about anything else. How can I get out of this?”
Should I Honor Someone by Naming Them Trustee?
Regardless of experience, do not name someone as trustee “to honor” them. Name someone you believe to be trustworthy and responsible.
Merely “well-intentioned” will not cut it. You want someone who can get the job done.
Private Professional Trustees, Trust Banks, and Trust Companies
If you don’t have a family member or close friend you consider responsible, whom I call a “civilian,” you may want to consider a “private professional fiduciary.” These are people who hold themselves out to the world as professional trust administrators. Some states actually have a registry for private professional fiduciaries and may require them to act under a bond (see below for more on bonds). Some states don’t regulate the profession at all.
A trustee has tremendous and independent power, so if you go the private professional route, do your due diligence.
Another option is a trust company or a trust bank. If you are working with a specialized estate attorney, they can likely recommend one of these to you.
Let’s look at these options.
Consider a Trust Company
Trust companies are “non-custodial” institutions that provide trust administration services but not financial advice. They will typically be named to administer your trust, but who ends up handling your estate may change over time, just as your bank representative may change over time. You are naming the trust company, not their individual trust officer or representative, as your trustee.
Trust Company vs. Trust Bank: What Is the Difference?
A trust company is not the same thing as a trust bank, not even close—and they charge radically different fees.
A “traditional” trust bank is a “custodial” institution which means that it typically operates as a division of a large, traditional, state-chartered or nationally-chartered depository bank. The traditional trust bank handles both trust administration and investment of the trust funds. Traditional trust banks charge the highest fees, and they’ve been increasing their minimums over the years. Typically, you will have to pay them 1 percent to 2 percent of the total estate value each year. Over time, that can really add up.
Traditional trust banks also often invest in proprietary funds, so the bank earns revenue not only when they serve as trustee, but when the bank, as trustee, buys investments from the same bank that created the investments. Getting paid five times on the same money isn’t a bad deal for the large banks, but may be a bad deal for you and your beneficiaries.
The alternative is a more modern approach which is the “trust company” discussed above. These are smaller institutions, with the important difference that they don’t handle the investments within the estate. These non-depository trust companies perform only a fiduciary function, and leave the investing to a third-party financial advisor, typically of your choice. When you walk in, a non-traditional trust bank looks less like a bank and more like an accountant’s office. Fees at non-traditional trust banks generally tend to run 50 percent to 80 percent lower than at a traditional trust bank.
Location of Trust Companies, Trustees, and Beneficiaries Matter
The location of the trust company and the assets matter. A lot.
If you live in a high-tax jurisdiction, you should consider a trust company that operates only in a state without a state income tax, because this may help your trust avoid state income taxes. If you live in a state without state income taxes, this may not be an issue.
The state residency of the beneficiaries and the trustees will also matter.
Hence, a California resident may choose a trust bank in Nevada, South Dakota, Tennessee, or Alaska; so that after their death, continuing trusts for their loved ones don’t pay state income tax on income that is not distributed to a beneficiary.
However, if you are a Nevada resident and you name a California resident as the trustee of your trust, and this person actually starts serving as trustee, your Nevada-based trust will become subject to California state income taxation!
Astounding? Yes. Do you need a tax-savvy estate attorney to consult on these complex choices? Without question.
Consider the Age of Your Trustee Carefully
Whether you choose a civilian or professional trustee, consider everyone’s age carefully.
If you are in your fifties or sixties, and you name a trustee about your same age, remember that that person will age right along with you. You will likely have reached your eighties or nineties by the time you need your trustee. A trustee who’s also eighty or ninety years old may be in worse shape than you. Or already gone.
Private Professional Fiduciaries are often second-career folks who start in their fifties, so they also may not be around when the time comes. You may be dealing with their successor, or they may have named no successor at all. As part of choosing a private professional, you must ask, “What is your succession plan? Who’s the next person in line? What happens if you are hit by a bus?”
Let’s Talk About Honesty of Trustees
The chief advantage of naming a trust company or trust bank is simple. They won’t steal from your trust. I consider this a big plus. Why? Because the chief disadvantage of naming any individual, civilian or professional, as your trustee is equally simple. He or she can easily steal from your trust. Why? Because although they are legally bound by the terms of the trust, in practice no one except the beneficiaries of the trust will be watching what they do—no court or police typically oversee the actions of a trustee. And no close accounting is typically made unless someone decides to sue that trustee. It can be stealing candy from a baby – literally.
I always urge my clients to create a living trust to avoid probate court. But yes, in a court proceeding, other people are at least watching. Indeed, with a court-supervised proceeding, any executor who is named for an estate must typically operate with a bond and account to the court.
A bond is not exactly a form of insurance, but if the executor of a will steals the money in your estate, the bonding company will replace the money. If the bond is for $100,000 and the executor steals $100,000, the bonding company will deposit $100,000 back into the estate. After that, of course, the bonding company will go after the thief to get the money back.
Trusts with named trustees do not typically operate with bonds. And yes, thefts by the executors of wills and the trustees of living trusts do occur.
What Happens When a Trustee Steals from an Estate?
Some years ago, I was handling a probate case for a modest estate. The deceased left no will or living trust, but an executor had been named by the court. That executor was my client. About a month before the final hearing, my firm filed an accounting with the court in which we said, “Your honor, here’s all the money we started with. Here’s all the money that went out. Here’s what’s left, and we are pleased to say that all the numbers add up.”
A couple of days before the hearing, the judge asked, in a tentative ruling, “I want to know exactly how much cash this estate now has on hand. I know you filed this petition a month or two ago, so how much does the executor have today?”
He had asked a reasonable question, and I called my client. She picked up the phone and said, flat out, “Well, Jim, I gambled all the money away.”
Now I have a dilemma because my client has told me she has committed a crime. She has admitted to embezzling the money from the estate, but because of attorney-client privilege, I cannot tell the judge. On the day of the hearing, however, I have to stand in front of his bench.
“Okay, Mr. Cunningham,” says the judge, “tell me, how much is now in this estate?”
“Your honor,” I reply, “there’s nothing in the estate. The estate has zero dollars.”
“Well, what happened to all the money?”
“I can’t tell you.”
Now the judge gets a little angry. “The heck you can’t tell me. What happened to that money? You are the lawyer for the estate. You must know what happened.”
I say, “Your honor, I can’t tell you what happened to the money. That’s privileged.”
You can see the light go on in his head. His eyebrows go up. “Ah,” he nods. “Okay, I get it.”
Right then and there, the judge signed a bench warrant for my client’s arrest. She was picked up the following weekend and charged with embezzlement.
Is Anybody Watching a Trustee?
In the story about the gambling executor, it turned out that she stole the money and blew it in less than a week—but the court found out because it was a supervised probate.
If a trustee without a probate process decides to steal from a trust, actually holding her accountable for her crime can take a year or longer with a trust as opposed to a will going through probate court. She could drain tens of thousands of dollars in a way that no one notices. No lawyers or judges will be around to see it happening.
I tell you all this to drive home the importance of your selection process. The power and independence of trustees provide the key benefit to living trusts, but that same power and independence mean you must choose your trustees very wisely, indeed. If you have the slightest doubt about a potential trustee, appoint a different successor trustee.
The Role of the Trust Protector for a Continuing Trust
You should also consider the use of a trust protector.
A trust protector is typically an attorney or other qualified professional who has the power to make limited changes to a trust without going to court, including changing out the trustee if things go south. I urge you to read my extensive article on trust protectors, as I almost always recommend them. The use of a trust protector will be especially important in any “continuing trust,” i.e., a trust intended to last more than a year after you pass away, such as for a disabled loved one, a child with special needs, or for a trustee beneficiary who is otherwise incapacitated.
Preventing Elder Abuse in Trustee Scams
As people age, they are often unable to look out for themselves. They become unable to handle their own affairs and look to others for guidance. At age eighty or ninety, friends start dying, trusted professionals retire, and a spouse may already be gone.
Their world shrinks. And as a result, they become vulnerable to false friendships.
For example, someone working in an older person’s home can quickly become the elder’s new “best friend.” After a while, this person gets the shut-in to resign as trustee of their estate, or switches out the trustee and appoints themselves as trustee—long before the shut-in dies. Our firm has received calls from police departments telling us that our clients had fallen victim to this kind of elder abuse, and we needed to get involved. You can read more about elder scams and other issues in helping aging parents in this article.
A trust protector can remove this new designated trustee right away with a single signature on a piece of paper—and stop the bleeding until the family figures out what’s happening. Without a trust protector, family members will have to go to court in order to have the trustee removed, and use their own money to protect mom.
Remember, however, that a trust protector is not actively monitoring the situation of the trust. Someone else must see what’s happening and call in the trust protector when needed.
Suggest a Trust Administration Lawyer to Help Your Civilian Trustee
First and foremost, trustees must be level-headed people who can handle the emotionally charged duties necessary after the death of a loved one. That’s why bringing in the pros may be best.
Even if the estate names an individual as trustee, rather than a trust company or independent professional, that trustee may choose—and I recommend—to use an expert estate law firm such as mine for trust administration. This will relieve much of the stress and reduce the overall emotional burden.
Among the many important reasons for a new trustee to work with a trust administration lawyer is to reduce the chance of making a mistake that creates personal liability. Being a trustee is fraught with risk because trustees are personally liable for handling an estate properly.
Among other things, we tell trustees, “Don’t tick off your siblings. At least, not unnecessarily.” And indeed, the first thing many trustees do is tick somebody off. Then, that somebody goes to a lawyer. Then things get ugly.
The estate’s original law firm will often play a key role in guiding the first steps of the trustee and heading off conflict. Indeed, law firms will often write their contact information directly into a trust, with instructions for the trustee to contact them immediately. The firm puts its phone number right into the document, and there’s nothing wrong with that. No one knows the trust better than the people who wrote it.
But when it comes to choosing a law firm to do long-term trust administration, the trustee must exercise caution and do some due diligence—and not simply assume that the original firm is the best choice.
Many lawyers know how to set up an estate plan, but they do not necessarily have enough experience to know how to effectively administer an estate plan after a death. In fact, this kind of work often requires an entirely different personality type and skill set. Trust administration lawyers such as those in my firm must be extremely diligent and detail-oriented over a longer period of time than a lawyer who is creating an estate plan. They must embrace the responsibilities in repetition and routine.
Regular lawyers, on the other hand, are often interested in the initial puzzle, in reading situations with their “legal brains” and fighting lively battles. “Thinking like a lawyer” may be important at one stage in the game, but a detriment at another. Boeing designs aircraft, Southwest flies them. There’s a reason that Boeing does not run their own passenger airline and a reason that Southwest does not build their own planes. The skillsets are very distinct.
A larger law firm like mine will have attorneys dedicated to estate planning. Then they will have separate staff and attorneys dedicated to trust administration. A kind of wall will separate these two functions because these functions work best when the right people are focused on the right job.
You would do well to explain all this to your future trustee in the letter of instruction you can include with your estate plan.
Take Your Time Choosing Trustees, Discuss It with Them, and Revisit Your Choices Often!
The bottom line? Take your time choosing your successor trustees. Before you appoint a successor, discuss your choice with them, and make sure they are on board with the responsibilities you intend to give them. Consider writing an extensive letter of instruction to accompany your will and trust giving instructions and advice to your future trustee—including the possibility of engaging a trust administration firm.
But the very best trustees, trust banks, and trust administration lawyers will be helpless if the trust has become obsolete by the time it has to be administered.
That’s why I need to repeat that the most important advice I can give about choosing trustees is to revisit your choices with a lawyer every few years—we suggest every three years as a rule of thumb. Circumstances change. People change. Make sure your choices still make sense when you are no longer around to see them play out!
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We look forward to working with you!
Best, Jim
James Cunningham Jr., Esq.
Founder, CunninghamLegal
At CunninghamLegal, we guide savvy, caring families in the protection and transfer of multi-generational wealth.
