When establishing a trust, you need to give serious thought to choosing your successor trustee—the person who will administer your trust once you’re no longer able to do so. This individual ideally should be:
- Someone you trust implicitly.
- Someone who is organized, responsible and meticulous.
- Someone who can remain steadfast to your wishes in the face of family disagreements and other disputes regarding the trust.
That said, even the most capable, well-intentioned successor trustees can make mistakes when managing affairs. Here are five surprisingly common mistakes, along with preventative steps you can take.
1. FAULTY RECORD-KEEPING
To ensure that a trust fulfills its purpose without being contested, the trustee must keep accurate, detailed records of income and distributions. Your trustee must also be prepared to report these figures regularly to the beneficiaries and heirs. If these records are incomplete or inaccurate, the door is opened for someone to challenge the trust, potentially leading to lengthy and costly court battles.
To prevent this mistake: Hire an accountant to assist the successor trustee in record-keeping, and make sure the trustee and the accountant make a connection before the trustee takes over.
2. MISUNDERSTANDING THE FIDUCIARY ROLE
Many trustees mistakenly assume their job involves acting in the best interests of the person setting up the trust. In reality, their job is to act in the interests of the beneficiaries of the trust. Furthermore, the trustee may be legally liable for any failure to protect the beneficiaries against bad investment advice concerning the trust.
To prevent this mistake: Detail the fiduciary role of the successor trustee in the trust documentation itself, and be certain that the trustee understands his/her role.
3. NOT COLLABORATING EFFECTIVELY WITH YOUR ESTABLISHED FINANCIAL TEAM
The successor trustee’s failure to communicate with key members of your team while administering your trust can lead to inaccuracies, misunderstandings and significant, preventable financial losses.
To prevent this mistake: Make sure your trustee is properly introduced to, and connected with, your attorney, CPA, financial planner and anyone else involved with your estate planning.
4. FAILING TO DISCUSS COMPENSATION
If your appointed trustee is a close friend or family member, the topic of compensating the trustee may be glossed over or forgotten. This oversight can result in a lack of morale or even resentment if managing the trust becomes difficult or time-consuming.
To prevent this mistake: Bring up the topic of compensation yourself when you establish the arrangement; be as generous as you deem necessary, and put the compensation terms in writing.
5. FAILING TO REMAIN OBJECTIVE
Many people choose a close family member as a trustee. This strategy can be appropriate, especially when privacy matters. However, disputes about money can happen even in the tightest-knit families, and it can be difficult to near-impossible for a relative to remain neutral when resolving those fights. The end result could be decisions that family members perceive to be unfair or that wind up being inconsistent with your intentions.
To prevent this mistake: Make certain the person you choose can remain neutral and faithful to the terms of the trust, even under duress. If there is any doubt, consider hiring a corporate trustee with no emotional connection to the family or estate.
Selecting a successor trustee is one of the most important decisions you will make during your estate planning process. Work with your estate planning team to ensure your successor is fully prepared.