The Five Most Common Successor Trustee Mistakes (and How to Avoid Them)
What is a benefit of a revocable living trust?
Bob and Edna Wyatt came to see us when Bob’s health began to decline. An important part of their estate plan was the joint revocable living trust. As the trustors or grantors of the trust, they each and both enjoyed all of the powers defined by the trust. That means each could buy and sell real estate, manage any investment assets, and access the trust bank accounts exactly like they used to before establishing their trust.
One of the real benefits of the trust is that when Bob’s health began to decline, Edna still had access to all of their financial resources to manage Bob’s healthcare needs. And after he passed away, she remains a trustee, so nothing changes for her. She still has access to manage any and all assets in the trust for her own needs. Although there are things that need to be done to close out a person’s estate, Bob and Edna’s revocable living trust stays in effect after one spouse passes away.
What is a successor trustee?
After Edna’s death, though, the trust changes. It becomes an irrevocable trust, because the people who created it are no longer around to make changes and they are, except in rare circumstances, the only ones who can make changes to the trust they created. And finally, Bob and Edna chose someone to administer or manage the assets in their trust after they both passed away. That person is called their successor trustee.
When establishing your trust, like Bob and Edna, you gave careful thought to who would be your successor trustee—the person who will manage, invest, and distribute your trust’s assets once you are no longer able to do so. This individual is someone you trust implicitly, someone who is organized, responsible, transparent, and meticulous. He/she should be someone who can remain steadfast to your wishes in the face of family disagreements and other disputes regarding the trust.
The 5 Common Mistakes of Successor Trustees
However, even the most capable and well-intentioned successor trustee can make mistakes when managing your affairs. Here are five common mistakes along with steps to prevent them from happening.
- Faulty Record-Keeping
Accurate record keeping creates transparency that helps decrease the chance of a decision or action by the trustee being contested. Your successor trustee keeps accurate, detailed records of income and distributions that are reported regularly to the beneficiaries and heirs. Inaccurate or incomplete records could create doubt for family members and force them to challenge the trustee, potentially leading to lengthy and costly court battles.
To prevent this mistake: A professional accountant hired to assist the successor trustee in record-keeping could keep the records accurate and up to date. Meet with your accountant and your successor trustee long before the successor trustee takes over.
- Misunderstanding the Fiduciary Role
Your successor trustee might mistakenly assume his or her job involves acting in the best interests of the person who set up the trust. Actually, the successor trustee’s job is to act in the interests of the beneficiaries of the trust. One thing people often don’t know about the fiduciary role is that a trustee may be legally liable for failures to protect the beneficiaries. One example is that a trustee could be held responsible for bad or inaccurate investment advice.
To prevent this mistake: Detail the fiduciary role of the successor trustee in the trust document and be certain that the successor trustee understands the role. Communicate with your successor trustee what is expected. Attend our Legacy Protection Plan workshops Trustee School Part I and II with your successor trustee to learn exactly what a successor trustee is responsible for.
- Not Collaborating with Your Financial Team
A good estate plan requires a team of individuals to carry it out successfully. Your successor trustee’s failure to communicate effectively with members of your financial team while administering your trust can lead to inaccuracies, misunderstandings, and potentially significant preventable errors or financial losses.
To prevent this mistake: Properly introduce your successor trustee to your attorney, certified public accountant, financial planner, and anyone else crucial to your estate plan. Ask them to have a conversation about each person’s role and share their contact information.
- Failure to Discuss Compensation
You might not feel comfortable discussing financial compensation with a close friend or family member. Administering your estate could take significant time and attention. If a professional trustee would be compensated, so should your friend. Lack of compensation can create disappointment or resentment if managing the trust becomes difficult or time-consuming for the trustee.
To prevent this mistake: Bring up the topic of compensation early, when you approach your trustee. Be as generous as you deem necessary, and put the compensation terms in writing. Your estate planning attorney can help by giving you a range of appropriate compensation.
- Failure to Remain Objective
For a variety of reasons, people often choose a close family member as a trustee. He or she already knows many of the people and relationships involved and can be sensitive to privacy concerns. However, disputes about money can strain even in the tightest-knit families, and it can be difficult for a relative to remain neutral when resolving those fights. The end result could be decisions that family members perceive to be unfair or that are inconsistent with your intentions.
To prevent this mistake: Choose a trustee who can remain neutral and faithful to the terms of the trust, even under duress. If there is any doubt, consider hiring a corporate trustee with no emotional connection to the family or your accounts and property.
Your successor trustee is the most important person to help you make sure that your wishes are carried out. You deserve your wishes as designed in your estate plan, to be carried out successfully. Share these mistakes with your entire team.
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We offer workshops and webinars every month for our clients.
A few of the workshops that address successor trustees are:
Understanding Your Estate Plan
Trustee School Level 100 and Level 200
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