When you create a simple living trust to avoid probate, you must decide who to name as your “successor trustee.” It’s an important decision; this is the person who will take charge of the trust assets after your death, or sooner if you someday become incapacitated and unable to manage things yourself.
It’s common to choose a spouse, grown child, or close friend. But you may have questions that give you pause. Would your spouse be up to the task? If you name one of your children, which one—or should you make all of them co-trustees and hope they get along? Would a lawyer or trust company be a better choice?
What the Successor Trustee Does
First, you need to have an idea of what the successor trustee will be called upon to do. Remember that you’ll manage your living trust assets until you’re unable to do so. When you can’t, the successor trustee steps up to manage and eventually distribute the assets.
If You Become Incapacitated
A trustee who takes over the reins of the trust before your death must manage and invest trust assets, and spend trust money on your behalf. Trustees must be scrupulously honest and keep trust assets separate from their own. They must also follow state law, which may require investing trust assets in a diversified way.
This responsibility could last for years, depending on the situation. If it did, the trustee would have to file annual income tax returns on behalf of the trust (something you don’t have to do when it’s your own revocable living trust) and make lots of decisions about investments and spending. The trustee could use trust funds to pay for necessary professional help, but the job can be a lot of work. If, however, the trustee takes compensation from the trust assets, other family members could complain.
After Your Death
A simple probate-avoidance living trust isn’t designed to keep going after your death. So the trustee’s job is simply to identify, gather, and safeguard the trust assets, and then distribute them to the people who inherit them, as the trust document directs. The trustee may also need to work with the executor of your estate to pay your final income taxes and handle assets that weren’t held in the trust. And of course, the trustee of your living trust may also be your executor—many people pick the same person for both jobs.
Naming a Family Member or Friend
If, like most people, you choose your spouse or a grown child to wrap up a simple living trust, things will probably work out fine. Commonly, the job takes only a few weeks or months, and the successor trustee may not even accept payment for the work.
But of course, how things work out will depend on your unique family circumstances. Sometimes it’s difficult for a surviving spouse who is grieving or taking care of you (because you’ve become incapacitated) to take on the responsibility of a trust. And if you entrust one of your children, you want to be sure that child is honest, detail-oriented, fair, and a good communicator. The person you choose doesn’t need to be a financial expert, but must be able to find good, honest advisers to help with taxes or other matters that come up.
A family member who has good judgment—and tact—could be an excellent trustee. No outsider will understand family dynamics, including such things as long-standing grudges, personality quirks, family businesses, and substance abuse issues, as well as a family member.
The trustee does not have to live in the same state as you. Someone who lives close by will probably have an easier time, especially if local real estate is involved, but many transactions are handled online these days.
If you don’t think a family member could handle the responsibility well, or you fear family conflict, can you avoid these problems by hiring the trust division of a bank, or a trust company to serve as trustee? Maybe. A competent professional trustee can provide investment knowledge and experience, good recordkeeping, and unbiased decision making when it comes to giving money to beneficiaries.
A professional trustee can be useful if you have very valuable assets and a trust that’s intended to last a long time—for example, to provide for grandchildren. It rarely makes sense to pay a professional simply to wrap up a simple living probate-avoidance trust.
Professional management is expensive. Trust companies won’t accept accounts that are below a minimum—commonly $500,000 to $1 million—and most charge a percentage of the assets as their fee. The percentage for the first $1 million or so is typically .5 to 1% and goes down if you have more assets.
Professional management can come with some drawbacks:
- Most will manage and invest cash but won’t accept other kinds of assets (real estate or valuable items), that must be appraised, insured, and safeguarded.
- A corporate trustee doesn’t know your family; management is impersonal.
- Because trust company and bank employees come and go, beneficiaries may have to deal with new people frequently.
- To keep things simple, a trust company may invest trust assets in a set of standard investments that might not be what you would choose.
- Beneficiaries may not get a prompt decision when they ask for trust funds.
What about naming a family member and a professional, as co-trustees? It could be the best of both worlds—or the worst. You still have the expense of the corporate trustee, and the family member still has great responsibility. But if you’re worried about family mistrust or disputes, professional management, with decision making input from a family member, could be just the ticket.