All too often, not enough consideration is given to selecting the person (or persons) that will manage your trust assets upon your death or incapacity. This person, known as the “successor trustee,” will step into your shoes, and will be in charge of controlling, administering, investing, and eventually distributing trust assets. A successor trustee can be an individual or individuals, or it can be a corporate entity (such as a bank). Generally speaking, clients tend to want to appoint a family member or close personal friend as successor trustee. But is this the best person for the job? Are they up to the task? Are they qualified or equipped to handle for this responsibility? On the one hand, there is value in selecting an individual who knows the family relationships and can appropriately determine the specific needs of the trust’s beneficiaries based on knowledge of family history. But on the other hand, the successor trustee has a substantial task ahead of them, one that is time-consuming, complicated, and oftentimes undesirable. Additionally, actions taken as successor trustee can expose that person to potential liability for any number of reasons.
There are a number of factors to consider when deciding to appoint the appropriate successor trustee. Although every situation must be analyzed on a case-by-case basis, this article will strive to set forth some of the important trustee selection considerations.
1. Knowledge, experience, and competence. A person or entity acting as successor trustee owes fiduciary duties to the beneficiaries of the trust, meaning that the successor trustee is legally obligated to act in the best interests of all beneficiaries. Although the term “best interests” is ambiguous, it generally means that the trustee must do the right thing in the given situation, all while acting under the duties of care, loyalty, and impartiality, among others. In Illinois, the trustee has an additionally duty imposed by statute, whereby the trustee must “prudently invest” trust assets, meaning the trustee has the duty to reasonably manage and authorize investments just as a reasonable (or “prudent”) investor would do under the same circumstances. Moreover, the trustee is required keep a detailed record of all trust asset transactions. Clearly this can be a labor-intensive responsibility, and one that may not be suited for a family member who is inexperienced in asset management or business dealings. Thus, it may be the preferable route to select a trustee that possesses the requisite knowledge, experience, and competency to adhere to the prescribed responsibilities assigned to a successor trustee. Nominating a family member who is financially savvy would accomplish this goal. But, this person may still be subject to emotion and bias (as described below). If you have specific wishes, complicated or rigid guidelines, it may make sense to consider nominating a corporate trustee such as a bank, trust department, or accounting firm to serve as successor trustee.
2. Bias, relationships, and fairness. There are pros and cons to appointing a corporate trustee (such as a bank) or a family member to act as successor trustee. The family member likely has a better understanding of the family history and would be able to offer a personal touch when managing assets for the beneficiaries. But there is a risk that this family member will not be neutral when administering or distributing trust assets to different beneficiaries. When family member successor trustees are empowered with the discretion to manage trust assets, unforeseen consequences can arise given the various emotional dynamics and bias among family members. This can lead to hostility, litigation, family division, and other negative outcomes. By contrast, a corporate trustee is not subject to the same family influence because the corporation operates within a set protocol, and usually a group of trust officers will meet to discuss the administration and distribution of trust assets, residing in a role of a neutral third party, unfazed by emotion. Logic, reasoning, and unbiased deliberation allow the corporate trustee to exhibit objectivity and fairness when beneficiaries request distributions or a change in trust management. Regardless of the choice, there are legitimate reasons on both sides of the coin when deciding to appoint an individual or bank to act as successor trustee.
3. Availability, time, and responsibility. Along with the legal responsibilities mentioned above, a successor trustee may have to put in a considerable amount of time, energy, and effort to meet the duties owed to the beneficiaries. Creating detailed records, accountings, and weighing investment options can lead to not only a time burden, but can also be an emotional burden. A family member probably has their own immediate family to worry about, let alone helping manage your assets as well. Conversely, a corporate trustee operates in the management space on a daily basis, and their sole job is to manage trust assets in a prudent manner. This consideration may lead in favor of appointing a corporate trustee.
4. Costs, fees, and compensation. Although naming a bank as successor trustee will likely accomplish the goal of ensuring prudent and unbiased management of trust assets, this appointment comes at a price. Banks typically charge a percentage-based annual fee to administer and manage trusts and estates based on the value of the estate. Individuals that act as successor trustees can also have the right to receive “reasonable compensation” for their services, time, and effort, but the individual can (and often does) decline to accept compensation. This consideration may lead in favor of appointing a family member as successor trustee.
Certainly, there are numerous and multi-layered considerations that go into selecting a successor trustee. When deliberating as to whether you want a person or corporate entity to serve as your successor trustee, it is important to keep the above factors in mind. Although none of us have the proverbial “crystal ball” to see into the future, there are means by which you can determine which person would be a good fit, or at a minimum, which person would not be the right fit. Weigh the pros and cons, and allow yourself the time to properly consider this important decision. Each situation is different, and like the rest of estate planning, there is no “one size fits all” approach. If you would like to discuss your options, or have questions about trusts, wills, powers of attorney, or any other estate planning matter, you can reach the author of this article, Ryan Gardner, at (847) 705-7555, or by e-mailing firstname.lastname@example.org.
Disclaimer: This article provides legal information of a general nature and is not intended as legal advice, nor does it create an attorney-client relationship with any person or group of persons. Should you wish to obtain legal advice concerning your particular situation, contact an attorney.