The most important decision you must make when creating a living trust

Medical Economics Journal, Medical Economics June 2021, Volume 98, Issue 6

Naming a successor trustee is treated as an afterthought when creating trusts, though it’s one of the most important decisions involved.

When creating a living trust, many people designate an adult child as successor trustee—without first discussing it with that person.

As a result, many designated trustees are completely unaware that they’ll be assuming this role until the trust’s creator, their parent, become incapacitated or dies.

When spouses are designated trustees, they tend to be aware of this eventual role far in advance, as couples usually discuss such matters. But many parents are reluctant to discuss the inevitable with their adult children and vice-versa.

Thus, successor trustees often have no awareness of this role until they must assume it. And when the time comes, even if they’re willing, they may not be prepared or able to execute the duties required.

This scenario can lead to poor estate administration, declining estate values and conflicts among heirs that can lead to litigation, resentment and a boatload of stress for everyone involved.

But if successors are aware of this role and what it involves well in advance, these problems might be avoidable.

Selection and preparation of suitable successor trustees can be assured by acknowledging the parent’s mortality and discussing eventualities (Typically, adult children are designated when only one parent is alive).

These discussions should center on the wishes of the parent creating the trust, the common interests of the beneficiary children, and the best ways to serve these interests fairly, transparently and efficiently.

Usually, the best context for such discussions is a family meeting where all considerations are aired and, ideally, family members agree on whom the successor trustee will be. Also, families should outline the specific duties of the trustee, the guiding principles for performing them and the preparation necessary, if any, to assume them. These items can then be included in trust documents by a qualified estate attorney, contingent on that professional’s advice.

Items for discussion at such meetings include:

  • Trustee selection. Does the candidate have the time, skills and experience to fulfill this role? Would serving as trustee be too inconvenient? (It might be if he or she lives in a different state.) Does the person have the expertise, based on his or her education and profession?
  • Skills over seniority or gender. Traditionally, many parents have reflexively appointed their eldest child, especially if that child is male. But neither the eldest nor any of their male children may be the best candidate. And for many parents, of course, confining candidates to male children of course reflects an outdated view of gender roles. In a society with an abundance of women lawyers and an increasing number of women in financial professions, many trustors might have obvious candidates in their daughters. Whoever is selected, the trustee must be willing and ready to assume the role, and ideally should have the endorsement and support of their siblings. This can go a long way toward preventing problems down the road.
  • Specific duties. These fall into two categories: duties during incapacitation of the trustor and those assumed after the trustor’s death. Though incapacitation is common, many families don’t seem to be aware of this likelihood. For trustees, incapacitation can mean long-term handing of the trustor’s day-to-day financial affairs, ensuring that accounts are kept up to date, property is managed, and bills are paid.
  • Managing principles for investment accounts. Without stipulations in trust documents, the trustee could have unlimited leeway in managing these accounts, so all family members should be on the same page about how this is to be handled. For example, it’s in all beneficiaries’ interest to avoid high-risk investments and to avoid unqualified, imprudent investment managers.
  • Differences between financial advisors. Trustees should know—or, if not, should become educated about—the difference between non-fiduciary advisers (such as brokers, who basically act as salesmen) and fiduciary advisors, who are legally bound to adhere to fiduciary standards requiring that they always put their clients’ interest ahead of their own.
  • This is only appropriate and logical, as trustees and estate executors are themselves fiduciaries. If the trustor has a relationship with qualified, professional fiduciary advisors, it’s a good idea for the trustee to meet them upon accepting the role so the relationship can be smoothly transferred. Not uncommonly, beneficiaries have had the disappointment of seeing their inheritances shrink after the trustee invested estate funds in high-risk assets that promptly went south. Placing some parameters on investments and advisors in trust documents, where legally feasible and advisable by qualified estate attorneys, can help preserve estate values and help avert disappointing investment outcomes.

Of course, family discussions on these topics can be difficult in dysfunctional families or those where longstanding distrust among siblings fosters fears of self-dealing by the trustee.

In such cases, siblings’ fears may be allayed by including specific guidelines for estate administration, during incapacitation and after death, in trust documents.

All too often, naming a successor trustee is treated as an afterthought when creating trusts, though it’s one of the most important decisions involved.

Discussing the duties in advance with the designated trustee—and getting the whole family involved—is the best way to avoid bequeathing problems to heirs.

David Robinson, a Certified Financial Planner, is founder/CEO of RTS Private Wealth Management, an SEC-registered firm in Phoenix that provides fiduciary services to help clients achieve their financial goals. His practice focuses on helping wealthy individuals with custom financial plans, using a holistic approach to grow/protect wealth, manage taxes, identify insurance solutions, prepare for retirement and manage estate plans.