Given how popular trusts have become in recent decades, there is a very good chance that you will choose to incorporate a trust into your overall estate plan. If you do, you will need to choose a Trustee to administer the trust. A common mistake to avoid, however, is failing to also name a successor Trustee. Let’s see why naming a successor Trustee is so important.
Trusts can be broadly divided into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust, activates during the Settlor’s lifetime. Living trusts can be sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time and for any reason. An irrevocable living trust, on the other hand, cannot be modified or revoked by the Settlor at any time nor for any reason once active.
The Job of Trustee
One of the most important decisions a Settlor makes when crating a trust is who to appoint as the Trustee of the trust. The overall job of a Trustee is to protect and manage trust assets and to administer the trust using the trust terms created by the Settlor. Think of a Trustee as the conductor of a train. Some of the specific duties and responsibilities of a Trustee include:
- Managing and protecting trust assets
- Abiding by the trust terms unless they are impossible, illegal, or unconscionable
- Investing trust funds using the “Prudent Investor Standard”
- Monitoring trust investments
- Communicating with trust beneficiaries
- Resolving conflicts among beneficiaries
- Making discretionary decisions
- Distributing trust funds to beneficiaries
- Approving or denying distributions if given discretionary authority
- Keeping detailed trust records
- Preparing and paying trust taxes
As long as the original Trustee remains willing and able to serve, the person (or organization) you name as the successor Trustee does not have any trust duties; however, if the Trustee becomes unable or unwilling to serve, the successor Trustee takes over as Trustee and becomes responsible for all the Trustee’s duties. There are an infinite number of reasons why the original Trustee might suddenly be unable to serve, including death, incapacity, poor health, unforeseen conflict, or relocation. Sometimes, a Trustee simply decides that he/she just not want the job anymore.
Regardless of why, if the Trustee is no longer able/willing to serve, for any reason, the train has lost its conductor. Without a Trustee, distributions cannot occur as planned. Important investment decisions cannot be made and/or investment opportunities might be missed. Recordkeeping could fall behind which could create problems with tax authorities. In essence, the train comes to a grinding halt on the tracks and won’t start chugging along again until a new Trustee is in place.
Why Is Naming a Successor Trustee Important?
The bottom line is that a trust must have a Trustee. If the original Trustee cannot/will not serve, a new one must be appointed. If you created the trust, you are still alive, and you have the legal authority to simply name a replacement, the problem is solved. If, however, the trust is an irrevocable trust, or the Settlor is not alive or is incapacitated, naming a new Trustee is not possible.
Therefore, if you failed to name a successor Trustee, or at least include instructions for how to choose a successor Trustee, the only option is for a court to appoint a new Trustee. One problem with relying on a court to appoint a new Trustee is that the process of petitioning the court may take time – time in which the trust is without a Trustee. In the interim, the trust could lose assets and opportunities.
The other big problem with relying on a court to name a new Trustee is the simple fact that someone you may not even know is now administering your trust. To avoid such an outcome, a successor Trustee should always be named in your trust agreement. In addition, you should include instructions for how to appoint a new Trustee if one is ever needed and you are unable to appoint one yourself.
Please download our FREE estate planning checklist. If you have additional questions or concerns about the need to designate a successor Trustee when you create a trust, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.