A living trust is an important piece of estate planning. Once in awhile parents will want to appoint co-trustees as their successor trustees. The question typically comes up when there are two or three children and parents don't want to leave one out. I'm asked, "Can we just appoint co-trustees in our trust?" Of course, I'll answer, "yes." However, then I explain the troublesome pitfalls of putting co-trustees in place.
What is a Trustee?
A trustee is a manager or administrator of a trust. He or she is responsible for the assets funding the trust. The manager takes cares of the assets for the beneficiary. Spouses take care of trust assets for each other. If a grantor becomes incapacitated, the other spouse takes care of that spouse with trust assets. The trustee is responsible for decision-making and following trust instructions.
What is the Role of a Successor Trustee?
A Successor Trustee manages the trust property after the following occurs:
- Grantor incapacity
- Grantor's death
- Grantor's resignation
- Court-appointed role
A successor steps into the shoes of the grantor or a resigning successor trustee. The successor trustee takes on responsibilities of trustee. The role is a fiduciary role that requires a duty of care, loyalty, and confidentiality. Some of the responsibilities of a successor trustee may include the following:
- Inventoyring assets
- Inventorying liabilities
- Paying taxes
- Working with power of attorneys
- Working with your estate planning attorney
- Paying bills
- Distributing assets at death
- Working with an executor for probate
Should You Choose Co-Trustees?
One might think of the adage “Two brains are better than one.” Strength in numbers is a good strategy. After all, co-trustees can divide and conquer duties and responsibilities. Co-trustees combine skills and knowledge to work together to oversee and protect trust assets. The co-trustee choice may appeal to parents who fear naming trustees to serve consecutively. Parents fear that their decisions will be interpreted as favoritism or a slight. There are children who push their parents to set up a co-trustee situation often from a root of sibling rivalry or dislike. Some may think it's a great idea to appoint co-trustees. However, drawbacks and pitfalls abound with the co-trustee choice. Often, I hear how great family gets along and takes care of one another. Incapacity and death often challenge the best family situations.
The Challenge of Co-Trustees
Two big family changes affect family dynamics: parental incapacity and parental death. The closest and tightest knit family stands to unravel from these two events. Squabbles and indecisions arise along with hurt feelings, and anger issues. Hidden or unresolved conflicts surface. The stress of situations taxes the best in everyone. How does a stress on family dynamics affect a co-trustee decision?
Co-trustees must work together and communicate with each other. If siblings have problems with each other or “an axe to grind?” major problems will surface. What are the sibling dynamics? If there are issues during normal life events, those issues will be exacerbated. Siblings must overcome emotional differences, political differences, and personality differences. Getting along for the holidays is different than working together daily for a parent's benefit. Helping a parent understand documents or running some errands is vastly different than working under the daily requirement of managing another's trust assets. Co-Trustee has disadvantages.
What are the Pitfalls of a Co-Trustee?
One of most difficult aspects of co-trustees working together is the requirement of unanimity. A majority rule does not exist for two co-trustees. The management of the trust means there must be agreement on all action taken. If Co-Trustees disagree, how will the conflict reach a resolution? Disagreements tend to end up in court with co-trustees suing each other. In addition, disagreements tend to disrupt the purpose of the trust. Lost time and cost over disagreements escalate tensions. Arguments and disagreements cause issues that the grantor wanted to avoid by appointing co-trustees. Because majority rule does not exist, often co-trustee issues become litigation matters. If there is not compensation provided, siblings may start fighting over workloads and time taken from other responsibilities. Rather than solving any perceived family disharmony, the real possibility of family feuds increases.
The alternative to unanimity is to enumerate specific powers to each co-trustee. Rather than solving a problem, giving each one specific duties and responsibilities creates more liability issues and litigation opportunities. Delegation of powers may be authorized but it does not relieve a trustee of responsibility. However, many institutions will not accept co-trustees acting independently and require both signatures. At some point a nexus occurs between jobs and disagreements invariably occur.
If co-trustees receive compensation, the compensation cost doubles. If it's family co-trustees, perhaps the grantor(s) leave an option to decline compensation or provide for no compensation to avoid the issue. However, if litigation occurs and a non-family or corporate trustee takes over, compensation will be mandatory.
As an attorney, I witnessed the co-trustee breakdown. Co-Trustees come to me after years of working with an incapacitated parent. Too many issues, questions, and problems caused poor funding of assets and even improper titling of assets. One co-trustee liked an attorney and the other wanted another attorney. Each had separate attorneys to represent them in case of disagreements, which led to more costs. Another issue I've had walk into my office include life event changes. Siblings move away for life events. Then the headache of long-distance co-trustee work occurs. Life changes. Health changes. If the grantor is incapacitated and lingers, a co-trustee may move on or become less interested. Sometimes waiting for money is not enough of a motivator.
Great families walk through my office door. But over time, I have seen the breakdown that often occurs. Life has its curveball moments. If co-trustee is not the best option, then what are alternatives?
The Co-Trustee Alternative
When parents pose the possibility of co-trustee to children, from experience I hear a resounding “No!” from adult children. Siblings tend to understand the rivalry, even in adulthood. Adult children tend to vocalize the innate sense of avoiding gridlock or disagreements. Parents want everyone to get along. However, putting co-trustees in place will not achieve this desire. What are alternatives?
One alternative considers the corporate fiduciary route. If there is higher wealth, grantors may appoint a corporate trustee, usually at a bank or fiduciary with $25million. Corporate trustees charge a fee; however, it keeps family harmony. When there is higher wealth and multiple types of financing, a corporate trustee is more prepared to handle trust assets. It manages the assets, works with billing, prepares financial accounting documents and taxes.
Still some families balk at appointing a corporate trustee and want to keep it all in the family. Then it is best to appoint a Successor Trustee and name 1-2 other people to serve consecutively. Grantors may be advised to appoint a separate Distribution Trustee who will oversee the trust asset distribution, especially when the same person is a beneficiary and successor trustee.
Sometimes Grantors just want to keep children as co-trustees. A third alternative is to provide special language for an appointed neutral or Trust Protector who breaks the problem and makes a final decision. A trust protector also may have the ability to decant a trust, correct scrivner errors or interpret trust language, which helps the trust administration process move forward.
Your Trust Administration Attorney
Trust administration requires inventorying, recording, and maintaining assets. Trust administration goes beyond a mere division of assets between beneficiaries. Often trust documents contain specific requirements for incapacity, or death of one spouse, as well as sub trust information If you are a Successor Trustee, call 314-332-0011 for a complimentary consultation with Sheri Tucker. https://www.yourestateally.com/contact-us