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In the estate planning and probate practice, I find that many people do not give careful consideration to the
selection of trustees who will manage property in the event of death or incapacity of the client. Here are some
things that your clients should think about before making a hasty selection of a successor trustee, typically in
the instance of a Revocable Living Trust. If the trust is testamentary (created by Will), the trustee would
ordinarily manage property for a period of years, usually for a minor or elderly beneficiary.
Second Marriages. Second marriages pose peculiar problems where there are step-children involved.
Normally, each spouse wants to set up some continuing trust for the surviving spouse with disposition of the
remaining trust property at the survivor’s death. Step-children and the surviving spouse create a dilemma for
the trustor.
The trust would typically last for many years. Who is going to administer the property in the event of the trustor’
s incapacity? Naming a surviving spouse and a step-child (a child of the trustor) is asking for problems. No
surviving spouse wants to be beholden to a step-child for her (or his) support, whether the step-child is a co-
trustee or sole trustee. Making the surviving spouse the sole trustee makes the trustor’s children feel
vulnerable to abuse of trust monies.
Sometimes the solution is naming the surviving spouse along with a bank. This can work fine if the bank is a
diligent, conscientious trustee. Despite corporate trustee liability, it is sometimes surprising the laxity of
individual trust officers making discretionary distributions of principal to the surviving spouse where there is
no demonstrated need.
Finally, should a bank be the sole trustee? In some cases this might be the best solution, possibly with a
trust provision that the trustee must give advance notice of any discretionary principal distributions. (Amounts
to be distributed from trusts is the subject a separate newsletter.)
Typical Marital Trusts. In a typical case where a marital trust is established for tax or other reasons and the
children are the children of both spouses, the surviving spouse is often named as trustee of the marital trust
and often the family trust as well. In these cases, care should be given in the selection of the successor
trustee(s) who will take over in the event of incapacity of the surviving spouse. I usually suggest choosing one
child or three children to avoid the possibility of impasse that will occur if there are two trustees.
Impasse can be knotty problem when there are just two trustees who can’t agree. Many clients with two
children say that the children "get along fine" and don’t see impasse as a problem. In many cases, it isn’t.
However, we usually try to have some method of breaking an impasse, a family member or unrelated advisor,
for example, who is sometimes designated as "Trust Protector".
Trusts for Minors or Elderly Relatives. Estate plans of young people typically involve a trust for minor children.
For younger couples, this usually means a testamentary trust, established by Will, to take effect in the event of
a common accident. In the case of a single parent (which is becoming more common these days) the
testamentary trust is established at death, under the terms of the Will, with normal provisions for support of
the minor, meeting health and education needs and providing for distribution of remaining trust property at
specified ages.
In some cases there are trusts established for elderly relatives. Whether for minors or older individuals, these
trusts are designed to last for a long period of years. Even in the case of a young parent, the trust principal
can be substantial, especially if there is life insurance proceeds which are payable to the trust.
These long-time trusts involve administrative problems, keeping good records, filing tax returns, managing
investments professionally, that should not be taken lightly. In some cases there is a business or
professional practice which has to be dealt with. I generally advise clients that this responsibility can be huge
burden when placed on the shoulders of a family member. For the protection of the beneficiary, I generally
recommend that the trustee not be the same person or persons as a guardian for minor children. That would
expose the child’s inheritance to unwarranted risk of abuse, in many cases. All the more reason to select the
trustee with care.
Potential Abuses. Michigan law requires an accounting by the trustee to all beneficiaries, at least annually. In
many cases, individual trustees do not or cannot perform this function. Annual tax returns are filed, and in
many cases a tax return has to be filed for the beneficiary. In many cases, this record-keeping and reporting is
not done. Failure to do so may involve penalties and liability on the part of the trustee, if a minor beneficiary
decides that the funds were not properly managed, invested or expended. The potential for the trustee to
syphon off trust monies is tremendous. The potential for bad investments or "keep the kid happy"
expenditures is also large. In many cases, holding the purse strings is not a way for a relative to promote
family harmony. An individual trustee can be too permissive or too controlling. A minor beneficiary who feels
abused may take out his feelings of frustration and anger by lawsuits against the individual trustees.
Bottom Line. The bottom line is that the selection of trustee to manage property for family members should
not be hasty nor cursory. I often suggest a corporate trustee as a solution, either as a sole trustee or co-
trustee so that there is professional, disinterested third-party input to decision making, record keeping and
investment management. In my experience, the corporate trustee usually earns its fee in the service that it
provides and can certainly be a lightning rod for some member or members of the family who may be
unhappy.
If you have clients who would want or need knowledgeable consultation on the structure and administration of
their trusts, do not hesitate to contact Jim Modrall, at 941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| August 2003 WHO WILL BE TRUSTEE? by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |