Backdoors and Alleyways in Trusts

Estate Planning frequently requires choices as to how and when wealth is distributed to family. Just as death and taxes are certain, so too issues will arise and plans will be challenged. The skill of an attorney who can both craft and draft a document may be the difference between discord and harmony, especially when it comes to selecting a trustee.

The axiom, “what can go wrong, will go wrong” is well suited to the world of estate planning. I’ll offer a few examples of what can go wrong and choices an attorney can offer to insulate the plan from disaster.

The choice of a trustee may be the most difficult of all the estate planning decisions made. The role of a trustee may last for many years. The trusteeship is distinguishable from the personal representative’s role in its duration. A personal representative is appointed by the Court to effectuate the transfer of assets from the decedent’s name. The will document is a list of instructions governing that transfer. If the will includes a testamentary trust then the personal representative’s primary job is to transfer the estate assets to the trustee of the testamentary trust. Soon after, the personal representative can be dismissed. But not the trustee!

While the trust may endure for many years, the individual trustee might not be so lucky. Or the trustee may become ill or wish to retire. The carefully drafted estate planning documents always provides alternatives. Often the document will name a successor fiduciary, perhaps one or more alternate trustees.

In the case of the testamentary trust with income beneficiary and remainder beneficiaries, the selection of a successor trustee raises old questions. Does the selection of a successor trustee raise any conflicts of interest? Will the beneficiaries clash over the selection? What fees with the successor charge?

If the original trustee is unwilling or unable to serve and there is no successor named or willing to serve, the document should provide another safety net. One possible solution is to have the majority of the beneficiaries select the successor. Another is to have the original trustee, or any successor trustee, appoint his or her own successor. A third solution is to provide in the document a corporate trustee as the ultimate successor. Similarly, a beneficiary or beneficiaries can be entrusted with the task of naming a corporate trustee, assuming that the corporate trustee has the skills and has no conflict of interest.

There may come a time that the trustee is failing to properly perform their duties. Perhaps they are physically or mentally unwell. Alternatively, the trustee may prove to be unsuited for the job. Indications could be conflicts with the beneficiaries, improper expenditures from the trust, or unreasonable fees. To address the issue of the impaired or inappropriate trustee, two safety nets can be offered.

The first is to give a beneficiary or beneficiaries the right to remove and replace a trustee. This ability might be limited to demonstrated negligence or ineptitude. Otherwise, the beneficiary has a very powerful position when able to remove and, perhaps, replace the trustee whenever they choose.

The second strategy is to name a trust protector. The trust protector is a third party with a very limited interest. The trust protector will need information before any exercising any powers, such as the power to remove and replace a trustee. The best process is to require that the then acting trustee prepare and deliver a full accounting of the trust each year. With that accounting in hand, the Trust Protector should be able to determine if the trustee is properly performing their duties. If not, the Trust Protector may remove the trustee. The Trust Protector might even be given the power to appoint the successor trustee.

Once again, the most difficult task may be to determine who should be the trust protector. It should be someone younger than the trustee and someone with a financial sense so that they can understand the accountings.

The individual engaged in estate planning has now only a cursory introduction to the world of drafting and operating trusts. The key to a successful trust is to have good people available to serve and to plan for the many mishaps that can (and likely will) happen.

Evan J. Krame