Do You Really Want To Be a Successor Trustee?

When you set up a living revocable trust, you’ll almost always be the original trustee. When you die, you’ll name a successor trustee. When your parents die, you may be named as their successor trustee. Nobody ever sits you down and explains the trustee liability you are taking on.

All trustees are bound by fiduciary duties. As the trustee of your own trust or as successor trustee of your parents’ trust, you are under strict obligation to protect the trust accounts and use the trust funds for the sole benefit of the “beneficiaries.”

Of course, you are the trustee and the beneficiary in the living revocable trust you set up for estate planning. The trustee liability isn’t high there, because you’re probably not going to sue yourself for mismanagement of the trustee accounts. (Technically, the trust accounts are held in the name of the trustee of the trust.)

Trustee liability is huge, if you really look at the liability from a legal standpoint. There is a huge set of “fiduciary laws.” The beneficiaries can sue the trustees and successor trustees if they sneeze sideways.

Of course, Mom will be the successor trustee when Dad dies. But, who is the successor trustee when both Mom and Dad are dead? Most families choose a child as successor trustee when Mom and Dad die, and the estate will be settled with no problem. The child successor trustee will distribute the trustee accounts according to the terms of the trust, and everybody will be happy.

However, sometimes a bank is a good choice as successor trustee. I’ll admit, 99% of my clients chose a child instead of the bank as successor trustee, but the bank is best in some situations.

In my book, Protecting Your Financial Future, I spend a chapter on the factors you need to consider when you are picking a successor trustee. Who will you have; the kids; the bank?

The Bank as Successor Trustee

Most people feel like banks make a bad successor trustee. People don’t like the trustee fees. The bank will usually take only a fraction of a percent of assets under management as a “trustee fee,” but people don’t like to pay trustee fees.

People also don’t like banks as a successor trustee, because of the low returns typically earned in a bank administered trustee account. As successor trustee of your trust, the bank understands fiduciary laws. If the bank loses money in its trustee account, the bank is responsible to replace the trustee account to the beneficiaries. So, the bank is going to be very conservative in investing the trustee account.

An occasion to use a bank as trustee, in spite of the trustee fees and the poor returns, is when an independent trustee needs to be used. The bank is an independent trustee. An independent trustee needs to be used in some trust structures to avoid estate tax exposure.

An independent trustee should also be used in some trusts that are designed for asset protection.

I have used a bank as an independent trustee in some family situations. If you know that your kids will fight over your estate or one child will come against the successor trustee and put real pressure on the successor trustee, you may want to pick a bank as successor trustee.

A bank is an independent trustee for tax and legal matters, but it is also an independent trustee insulated from “family politics.” Banks have very thick skin when they are acting as successor trustee.

Yes, banks charge trustee fees, but they can stand up to bad situations when another successor trustee couldn’t make the stand. Think about what little money the trustee fee actually is when it comes to preserving family peace.

Trustee Fees for a Family Member Acting as Successor Trustee

Of course, if you are the trustee of your own revocable living trust, you aren’t going to charge trustee fees. Any trustee fee you get will be just moving money from one pocket to another. It doesn’t make sense.

Your living trust document should have a provision addressing trustee fees. Even if your successor trustee is one of your kids, the trustee fee provision may become important. It is going take a lot of time for your son or daughter to be the successor trustee. It may take enough time that they need to be compensated as successor trustee.

The trust document also should address the payment of expenses associated with management of the trust assets. This is different than the trustee fees and needs to be addressed separate from the trustee fees.

Make life easy for your child when they act as successor trustee. Give them some money to manage the trustee accounts and fulfill their duties as successor trustee.

Lots of trust documents fail to adequately address the needs of successor trustees. My book, Protecting Your Financial Future, walks you through all you need to consider when you are designing your living trust. Get it now.