Selecting your living trust trustee isn’t as simple as it seems. Just yesterday a client in Virginia asked me to who she should ask to be her trustee. This is a really important subject so I thought I’d share my response with you.
First, what is a revocable living trust? You may already know that it’s a very powerful document. If set up correctly, it can completely avoid probate and save your beneficiaries thousands or hundreds of thousands of dollars. It can also help get your estate settled in months rather than years. Like I said, it’s really powerful.
The trust’s main duty is to direct where assets are supposed to go after you go. Absent a trust, your assets are distributed either to co-owners or barring that, through probate.
Before I explain the duties of a living trust trustee, let’s look at what a trustee is. The trustee is the person who directs what happens to your assets. While you’re alive, you are usually the trustee. If you are married, you will typical be co-trustee of the trust with your spouse. If you die or become incapacitated, your spouse will take over. But when your spouse isn’t able to function anymore, a new trustee will have to take over. Most trusts have a provision to name another trustee, called a successor trustee, to take over once you are incapacitated or you die.
People like using trusts because they can still control who gets the assets after they die. They can change their minds while they are living and they keep the courts out of their business too. Nice.
As long as you transfer assets into your trust, the trustee calls the shots. So when you step down as trustee, the successor trustee takes your place. Your successor trustee must do with your assets as the trust directs. She can’t just do whatever she feels like doing. And she can’t divide the assets however she feels like. She must do what the trust tells her to do. She also can’t mix trust assets with her own assets. She must keep accurate records and filing taxes too. The only way the trustee can benefit from the trust is if the trust calls for paying the trustee and/or the trustee is also a beneficiary of the trust. She also can’t favor one beneficiary over another.
The trustee has to invest the trust assets as set forth by the trust. The trustee usually has the power to invest in a prudent manner but that may include investing in growth mutual funds. Usually the investment powers are very broad. The trustee doesn’t have to be a person who is savvy with taxes or legal issues. The trust will give her the power to hire accountants and attorneys.
Now that you understand a bit about what the trustee is responsible for, let’s get back to the question at hand. Who should be your living trust trustee?
First, I’ll remind you that I’m not an attorney and I encourage you to seek qualified legal advice on this question. But with that in mind, in most cases, you should be the trustee and if you’re married, your spouse should be the co-trustee.
If you die and you feel that your husband would need help managing his financial affairs, you can name a co-successor to replace you. This could be a friend or child and that person will be available to help your husband once you are unable to perform as trustee.
Should you use a professional trustee for your trust? There may be some circumstances in which it makes sense. But in most cases, it adds lots of expense unnecessarily. And the professional trustee will have an incentive to drag out the process rather than wrapping things up quickly. You don’t want a person on your team who has interests like that.
In most cases, as I said before, the successor trustee should be a friend or trustee. It should be someone who is smart and someone you trust completely. This person should be someone who knows her way around money and financial institutions. But as I said this person doesn’t have to be a CPA or attorney. She just has to be comfortable around these kinds of professionals and not be railroaded by them.
Remember, the trust will spell out who is going to get what so the trustee doesn’t have discretion over the asset split. For that reason, you can feel comfortable selecting an adult child. You aren’t showing favoritism by selecting one child over another. Consider that when you review your living trust. He or she isn’t going to necessarily get any special split because she is acting as trustee.
Having said that, you can set up your trust such that the trustee will be paid for her services. That’s fine. After all, it is a lot of work. Most people I work with name their children as successor beneficiary and don’t pay them but you can set it up any way you like.
The bottom line is that your successor trustee should be someone you trust to act fairly, responsibly and honestly. She should be smart and comfortable dealing with financial professionals. It should be someone who likes you and your family and willing to perform the duties of a trustee out of her love for you – not for the money….(even if you set up payments).
Did you have trouble selecting your living trust trustee? What were your concerns?
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