Creating a trust is a common part of modern estate planning. The trust can be made during life (living trust) or at death (testamentary trust). Either way, the trust is a solid way to protect and pass on a legacy. But every trust needs to have a Successor Trustee. This is who will take over when the current Trustee cannot manage it anymore.
The position of Trustee requires, as the name implies, significant trust in the person who will manage the trust’s assets. The Successor Trustee can be either a person or a corporate entity. Who the best choice is will depend on each person’s unique goals and circumstances.
For our purposes, we will primarily focus on living trusts. But much of the content will also apply to testamentary trusts. First let’s start with a brief overview of trusts generally, and then how Successor Trustees come into play.
Basics of a Living Trust
A living trust is an estate planning vehicle that has two main purposes. Assets in the trust are available use during your lifetime. The trust instrument directs how to distribute them after death. The key parties involved in a living trust include:
- Settlor: The individual who creates the trust and transfers assets into it. The Settlor can also be referred to as the Grantor or Trustor.
- Trustee: The person or entity responsible for managing the trust’s assets according to the trust instrument’s terms. The Settlor generally serves as the initial trustee.
- Beneficiaries: The individuals or organizations that will receive assets from the trust, either during the Settlor’s lifetime or after death.
With a living trust, the Settlor acts as Trustee while he or she is living. He or she is also considered a Beneficiary of the trust during this time.
The Beneficiaries are usually the Settlor’s spouse and children. But they may also be other family members, close friends, or even charitable organizations. Choosing Beneficiaries is generally not a difficult part of the process.
But choosing who will take over the trust can be a tricky decision, depending on your unique circumstances.
The Role of a Successor Trustee
A Successor Trustee steps into the role of the Trustee when the Settlor (or other current Trustee) can no longer do so. This may be due to incapacity or death. Whoever the Successor Trustee is will handle the distribution of assets, manage any ongoing trusts, and ensure that all the Settlor’s wishes are carried out.
The choice of a Successor Trustee can significantly impact the management of your legacy. So it’s highly important to carefully consider who should take on this responsibility.
There are two primary options for a Successor Trustee: an individual or a corporate trustee. Each has distinct advantages that may make one more suitable than the other, depending on your specific circumstances.
Individual Successor Trustee
An individual Successor Trustee is often a family member or close friend. This choice can be workable in situations where there is little risk of conflict among beneficiaries and where the trust does not require long-term management.
Some advantages of having an individual serve can be:
- Personal Connection: An individual Successor Trustee often has a personal relationship with the Settlor and Beneficiaries. This may provide a more personalized and compassionate approach to administering the trust.
- Lower Cost: Choosing an individual can be more cost-effective. They may not charge for their services or may seek a compensation rate that is much lower than professional trusteeship services.
- Familiarity with the Family Dynamics: A family member or close friend may have a better understanding of the Settlor’s intentions and the Beneficiaries’ specific needs.
These advantages can come with drawbacks, though. Individuals may lack the financial knowledge or attention to detail that a professional or corporate trustee can offer. The position can also be time-consuming with the amount of work that needs to be done managing and transferring assets.
Depending on the person’s relationship with the Settlor, it may also be emotionally challenging to carry out the duties of Successor Trustee.
Corporate Successor Trustee
A corporate trustee is a bank, trust company, or other professional fiduciary that actively manages trusts. This option can be a good choice when the trust requires long-term management. It may also be wise when there is a significant possibility of conflict among the Beneficiaries.
A corporate Successor Trustee offers a number of advantages:
- Professional Expertise: Corporate trustees bring a high level of financial and legal expertise. This helps to ensure that the trust is managed effectively and in compliance with all relevant laws and regulations.
- Impartiality: As a neutral third party, a corporate trustee can impartially administer the trust. This is often helpful in preventing or resolving conflicts among Beneficiaries.
- Long-Term Stability: Corporate trustees provide continuity and stability. They are not subject to the same life events that might affect an individual trustee, such as death, illness, or personal troubles.
- Comprehensive Services: Many corporate trustees offer a range of services, including investment management, tax preparation, and accounting. All of these are necessary with trusts that may last for many years.
The primary disadvantage of a corporate trustee is the cost, as they typically charge fees for their services. The trustee fees may be a percentage of the trust’s assets or an hourly rate. Because of the amount of work the corporate trustee is doing, this will often end up being somewhere around $5,000 a year at minimum.
That means the cost of administration has to make sense. A decent benchmark for when it does is for trusts with assets of around $1 million or more.
Additionally, some people may feel that a corporate trustee lacks the personal touch of an individual trustee. One way to deal with this is to have a co-Trustee named who has close ties with the family and can assist the corporate Trustee in administering the Trust. A Trust Advisor or Trust Protector may also fill this role.
Final Thoughts on Choosing Your Next Trustee
Choosing the right Successor Trustee is a pivotal decision in the creation of a trust. A well-drafted trust instrument will clearly name the next Trustee in order to make the transition as smooth as possible.
An individual Successor Trustee may be suitable for straightforward trusts with little risk of conflict and short-term management needs. On the other hand, a corporate Trustee is often the better choice for complex or long-term trusts. Professional expertise and impartiality are crucial for such trusts.
Carefully consider the nature of your estate plan and the specific needs of your Beneficiaries when deciding who should serve as your Successor Trustee. Consulting with an experienced estate planning attorney can also provide valuable guidance in making this important decision.
Connell Law, PLLC serves Rutherford County and the surrounding area with estate planning, including plans with living and testamentary trusts. Reach out to us today for a free consultation.
