Have you gone through the process of naming a trustee to take over a family trust after you’ve passed away? If you answer “yes,” that’s a good first step. But here’s an important follow-up query: does the trustee you’ve selected know that he or she is about to assume a potentially huge responsibility? If you answer “no,” you’ve missed a critical step in your legal planning.

Imagine discovering, in the midst of dealing with grief over the loss of a loved one, that the management of the family trust, which traditionally was handled by someone else, has now landed squarely and unexpectedly on your shoulders. That’s the surprisingly common scenario that Phoenix-based wealth advisor David Robinson addresses in this just-published article from NextAvenue.

Robinson’s straightforward advice: if you plan to name someone as trustee of a family trust upon your death, for heaven’s sake, make sure they’re prepared to assume the responsibility.

Naming a Trustee: Don’t Make It a Surprise!

Robinson begins the article by describing a situation he sees all too often: families failing to inform a trustee that he or she is suddenly responsible for the family trust. He uses the example of a family mourning the passing of the family matriarch, only to learn for the first time from their loved one’s attorney that one of the siblings is suddenly—and completely unexpectedly—thrust into a position of financial power over the other relatives.

“The matriarch was the trustee of a living trust — a legal arrangement that had been established by her husband and the father of the couple’s adult children,” Robinson explains. “The goal was to protect assets and direct their eventual distribution to heirs, the trust’s beneficiaries. Until his death, the patriarch had served as the trustee, the person in charge of fulfilling the trust’s provisions. When he died, his wife became the trustee.”

Naming a Trustee Without Asking Leaves the Designee Clueless

In the hypothetical scenario, after the matriarch has died, her role has now passed to an adult child. But this person is “stunned”, as Robinson puts it, because this significant responsibility came entirely out of the blue: “The designated successor trustee was clueless because the grantor, the father, never brought it up, much less obtained consent.”

Robinson adds, “Living trusts often require trustees to work with financial professionals to manage assets and distribute investment income to beneficiaries, handle taxes and maintain or sell real property, among many other tasks. This type of trust is not just for families with extreme wealth. Families of more modest wealth also can find them useful for tax- and estate-planning reasons. These trusts enable grantors to bequeath assets privately, and in some states avoid the public process of probate, which can be lengthy.”

Naming a Trustee Carelessly Can Create Family Complications

This surprise, on top of the grief of losing a loved one, can have negative knock-on effects in the family dynamic. Robinson explains, “Some heirs might not be happy with the choice of a successor trustee. They may lack confidence in that person’s ability or may be concerned about potential self-dealing.”

This can be compounded by the terms of living trusts, which often contain special instructions aimed at controlling the spending of certain beneficiaries whom the creator of the trust saw as less financially competent. “This can engender ill will among such beneficiaries toward the trustee, who is responsible for carrying out these instructions,” Robinson writes. “Regardless, how much value the estate will ultimately hold for distribution to beneficiaries may depend, to some extent, on the trustee’s ability to do the job.”

Naming a Trustee the Right Way: A Difficult Conversation

The most obvious way to avoid such nasty surprises may seem clear, but it’s not always easy. It includes a frank, honest, and sometimes difficult conversation, in which a grantor alerts potential trustees and obtains their consent to be considered for the role.

“All too often, the selection of a successor trustee is an afterthought,” Robinson explains. “They just have their attorney insert the name into the trust documents at the end of the process without giving it much consideration. But it’s really one of the most important decisions that grantors face and should be considered carefully from the outset.”

The Right Trustee: Both Willing and Able

Obviously, choosing an ideal trustee requires a bit of careful thought long before the documents are done and dusted. The right trustee should be willing and likely to do a good job at the tasks required. If they have pertinent skills, that’s favorable. If they don’t, the fastest learner is likely the best choice. 

“Another factor is location,” Robinson warns. “If a candidate lives out of state, this could make serving in the role cumbersome. Yet, with the increasing convenience of sending documents online and signing them digitally, geography is less of a consideration than it used to be.”

If multiple grown children are in the mix, the best choice is “the one with greater financial acumen”, according to Robinson.

But what if there are no suitable candidates? In this case, Robinson suggests designating a professional, as qualified financial firms offer trustee services, though he notes that some grantors may be uncomfortable with giving this kind of role to a non-family member.

“In such cases, grantors may decide to designate a professional as co-trustee to work with a family member,” he writes. “One advantage of using a professional trustee is that it reduces the chance of lawsuits between heirs, which is not uncommon when an heir is the trustee.”

Naming a Trustee: Prepare to Assume Many Responsibilities

Once a trustee candidate is chosen, but before the estate documents are finished, a meeting is scheduled to discuss the duties involved with the responsibility.

Robinson provides a detailed explanation of the trustee’s potential duties—which are dependent on the size and scope of the estate—but we have abridged them here.

• Preliminary duties: Locate, study, and begin implementing the trust (especially carrying out funerary wishes).
• Income taxes: Obtain copies of tax returns and file decedent’s taxes.
• Safeguarding assets: Insure and protect real and personal property; also, secure financial records and find online account passwords.
• Managing assets: Gather and list all assets, including those of investment accounts.
• Making payments: Pay all legacies and deliver specific bequests.
• Estate and inheritance taxes: File federal and state estate tax returns, if required. Inform beneficiaries of income and deductions.
• State legal filings: File/record the trust with the appropriate state agency if state law requires. Coordinate with the executor to file will and probate documents, if necessary.
• Ongoing management: Develop investment policy statement, document beneficiaries’ needs, and provide detailed accountings to all involved.

Robinson adds, “If a trust’s grantor is incapacitated (instead of deceased), coordinate health care with health care agent or appropriate family members. Obtain sworn statements of facts from attending and other physicians regarding capacity. Review bills and expenses for short-term needs.”

Naming a Trustee with Care and Forethought

Once a potential trustee is aware of the duties involved, they can make a much better and grounded decision about their ability to carry out the role. Alternatively, they could defer to someone else or choose to co-trustee.

Robinson writes, “After obtaining this consent, grantors might want to hold a family meeting to announce the selection to get buy-in. Then would be the appropriate time to name the successor trustee in the trust documents.”

He concludes, “This way, the family will know what to expect and the successor trustee won’t be shocked by finding out about this role while still in mourning.”

Breaking News: Rajiv’s New Book is Here!

We have big news! The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public.  As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.

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Rajiv then offers a solution: LifePlanning, his groundbreaking approach to retirement planning. Rajiv explains the essential planning steps and, most importantly, how to develop the framework for these elements to work in concert toward your most deeply held retirement goals.

Your retirement can be the exciting and fulfilling life you’ve always wanted it to be. Start by reading and sharing Rajiv’s important new book. And remember, Age On, everyone!

(originally reported at www.nextavenue.org)