Qualities of the Ideal Successor Trustee
You Never Know Ultimately Who Will Be the Beneficiary
Duties With Income and Expenses
Duties with Distribution
Options for Selecting Successor Trustees
Who Can Help You Decide
The One Decision Method Not to Use
Dear Mr. Miller:
Introduction: I am about to revamp my Living Trust. When it was originally written, my children were young and I named my brother as the successor trustee. Now I want to place my eldest daughter in that position followed by my younger child.
Both my children are in their 30’s now and I see no reason to burden my brother, who is significantly older than me, with that job. The trust leaves everything to my children and brother, and they all get along great. I have a 7 unit apartment building, my house (which will pass to my eldest for being so close to me over the years), and a stock and bonds account, all totaling about $1.5 million. The apartment building is a great investment so I will tell her to keep that rather than sell and distribute the money.
What factors should I consider in making this decision?
Reviewing one’s estate plan periodically is a good idea. I usually suggest maybe every 2-3 years. It sounds like you have gone a bit over that but since you are still in the “here and now” that shouldn’t be a problem.
Qualities of the Ideal Successor Trustee: I tell my clients that the successor trustee (i.e. the person who will manage everything when you can’t because you die, become mentally incompetent, or just find it too much work) is a very important position. That position should be filled by someone who is part financial planner, part CPA, and part attorney. That leaves out 95% of the world, including myself–so I am not lobbying for the position. But it probably also leaves out your two children. You may want to read this article on Selecting the Successor Trustee that I wrote some time ago that delves in depth into your choices.
You Never Know Ultimately Who Will Be the Beneficiary:But what could possibly be wrong with your eldest daughter and what could possibly go wrong when you are gone? First, you said that your brother, one of the beneficiaries of your estate, is a good deal older than you. That means he will probably die before you. So your eldest will not be dealing with her Uncle with whom she gets along great but, rather, with her cousins (her Uncle’s children) with whom she may not get along as well. In other words, you never really know with whom you will be dealing until you get to that point.
Duties With Income and Expenses: And what could possibly go wrong with your situation? I don’t know your eldest daughter’s background but I’m going to assume that she doesn’t own rental real estate and has never before been a successor manager. When you put the plan together, other than the house, everything was passing on your death one-third each (your two children and brother). If he does die before you and has three children (your nephews) it then will be passing two-thirds to your children and one-ninth to each of the three nephews. Will she, who has had no experience running an apartment building, understand that the expenses and the rental income have to be segregated from her own funds (since they are part of your estate which is passing to herself and four others). She can’t use them to pay the expenses on the house she is getting. This concept has sometimes proven difficult for others to grasp.
Duties with Distribution: And is she good with numbers so that when she does get to the distribution point and thereafter, she will know that she needs to give your three nephews one-ninth each of the available money while she and her sister get one-third each? Or will this be confusing to her?
She may be a very bright young lady, but some people just don’t deal with numbers and business well. Sure, she can get help–attorneys, CPA’s, property managers–but ultimately, she has to be able to do the math and handle the money.
Options for Selecting Successor Trustees: So what are the options? If you are not going to select a family member or close friend to be the successor, then you are going to be selecting from trust companies and professional fiduciaries. Trust companies are organizations, often banks, that handle estates. Professional fiduciaries are individuals who do the same thing. State law in most states requires the former to be licensed or approved in some way (either as a national bank, state bank, or trust company). In California, the latter are also licensed.
The One Decision Method Not to Use: Which group is your preference and why? And please don’t just say you have your checking and saving account with XYZ Bank and have for the last 30 years so that is the one you want. That could be a huge mistake. For example, some of the big banks have trust departments. But for clients with a couple of million, these banks are probably not a good choice. They cater to the multi-millionaires (and billionaires). The $1.5 million client is probably not going to get their best people or services and may even be under their minimum account value. So again, your attorney can be your best guide in making this decision.