When you have a revocable living trust, you typically serve as your own trustee. Upon your inability to serve as your own trustee, you name a successor trustee. While many trusts contain provisions regarding how a trustee no longer serves in the event of his or her disability, I’ve reviewed many trusts that don’t include removal or replacement of trustee provisions for reasons other than disability.
This is even more alarming when I ask my clients about the parties that they’ve named as successor trustees in their current trust documents. More often than not, my clients want to make a change. Sometimes the trustee that they’ve named has passed away, sometimes the financial institution no longer exists having been swallowed by a larger bank. It’s also common that my client no longer has a professional relationship with a financial institution named as trustee.
There’s nothing wrong with amending your trust to name a new successor trustee. Consider, however, that after you’ve become disabled or die, you can no longer amend your trust. What happens then?
Jim has a close relationship with his financial planner, Thomas. When Thomas changed firms, Jim moved his account since he wasn’t necessarily enamored with any firm so much as he appreciated Thomas’ wisdom and expertise. Jim named Thomas’ firm as the trustee of Jim’s trust. After Jim came down with Alzheimer’s disease, Thomas changed firms again. Jim could no longer serve as his own trustee, but Thomas’ old firm was the named firm to step in. Since Jim was incompetent he could not amend his trust again to remove the old firm and replace it with Thomas’ new firm.
Similarly, when Jim dies his wife, Jane, would potentially have to deal with someone unfamiliar with his financial plan. That is, unless Jim includes a provision in his trust that allows Jane (or someone else) to remove and replace the corporate trustee.
Jim’s revocable trust contains a provision that allows his spouse, Jane, to remove and replace any acting successor trustee. When Jim dies and his trust had the old firm still named, even though he no longer had a professional relationship with that institution, Jane could name the firm where their longstanding financial planner, Thomas worked.
The removal and replacement powers should be carefully considered, however. In blended family situations, a surviving spouse could be accused of shopping for a trustee most favorable to her situation instead of acting as an impartial fiduciary manner towards all of the trustees. In these situations, it might be best to require two individuals to remove and replace the successor trustee.
Jane is not the mother to Jim’s two sons, Zachary and Ethan. Rather than giving any one person the ability to remove and replace a successor trustee, Jim’s trust provides that during Jane’s lifetime, either Zachary or Ethan must join Jane in any removal and replacement of a corporate trustee.
Where the surviving spouse is serving in the role as successor trustee, this issue can become even more delicate.
Jim names Jane as his successor trustee, and Jane is the primary beneficiary of Jim’s trust for the remainder of Jane’s life. Jim trusts Jane explicitly, and does not want to cause conflict between Jane and his sons. Jim therefore provides that Zachary and Ethan must have “cause” in order to remove Jane as a trustee. “Cause” is defined as Jane being grossly negligent in the investment and management of the trust funds, or by making improper distributions.
Sometimes you will name a trustee for a child who has problems handling money, who may be a spendthrift, or who has drug, alcohol or gambling dependency problems. Here, the choices to be made are not easy.
At Jane’s death, Jim’s trust divides into separate continuing trust shares for Zachary and Ethan. Since Zachary is adept at managing money, Jim names Zachary to serve as his own trustee. Ethan, however, has been in and out of drug rehabilitation centers since adolescence. To protect him from himself, Jim named a corporate trustee to serve as Ethan’s trustee.
Here the issue is whether Jim should give Ethan, or some other person, the power to remove and replace the corporate trustee. Generally speaking, you never want to create a testamentary trust where the trustee cannot be removed. Financial institutions can change, merge with others, raise their fees or poorly perform with investments and administrative functions. When this is the case, you would want them removed.
But to give Ethan that power is problematic. He may shop for a trustee that will freely distribute funds to him, even though he intends to use those funds to support his drug habit. Giving that same power to Zachary poses other problems. What happens when Ethan asks Zachary to remove and replace the trustee and Zachary doesn’t see the need? Might this drive a wedge into their relationship? There are no easy answers here.
Every family’s situation will be different. That’s why I suggest that you explore these issues thoroughly with your estate-planning attorney who can draft appropriate provisions into your legal documents.
The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.
© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.