A Primer for Individual Trustees
Are you the individual trustee of an irrevocable trust? Are you working with a corporate trustee that makes fiduciary and investment decisions for your family? Perhaps, you are wondering whether you can separate the two functions, thereby creating a system of checks and balances for operating the trust.
This primer helps you 1) scan your trust document quickly and efficiently, 2) understand your authority, and 3) identify the requirements for replacing corporate trustees if necessary. It also:
- Raises questions you must answer,
- Assumes you are working with a PDF copy of an existing family trust, and
- Recommends key words and phrases (in quotation marks) to search with your computer.
Importantly, the terms in quotations are not a definitive list. You might find it necessary to try other words to locate the passages that answer our questions.
Do you have the authority to replace a corporate trustee?
Trusts vary in purpose, design, and complexity. Maybe you have the power to replace a corporate trustee. Maybe you don’t. Some trusts, for example, grant this authority to a “trust protector” rather than individual trustees. This structure often occurs in situations where the grantor (the person who originally created and funded the trust) believes there could be conflict among beneficiaries.
To find powers specifically assigned to you, start by searching “[your name]” or a phrase that describes your function: “individual trustee.” Try these words too: “change,” “remove,” “successor,” “co-trustee,” and “written notice.”
Are you required to obtain “consent” from third parties before replacing a corporate trustee?
Trusts frequently give family members, who serve as individual trustees, the power to make unilateral decisions. And just as frequently, they require individual trustees to seek approval from “beneficiaries” before making decisions. Either way, it is important to evaluate how the beneficiaries will react if you act to change corporate trustees.
Does the trust impose restrictions on whom you can name as the successor corporate trustee?
Some trusts require replacement trustees to be money-center banks or financial institutions of a certain size, perhaps defined by total assets under management. Try searching for “bank,” “trust company,” and “successor” to find the passages in your document that define potential limitations on your selection.
Where is the trust situs?
“Situs” is the place where something exists for legal and tax purposes. Your trust’s situs could be any one of the 50 states. Or it could be overseas. And because there are so many different “jurisdictions,” each with unique rules and “governing law,” no single financial institution administers trusts in all of them.
Make sure to narrow your search for a successor trustee that meets the specifications defined in your trust.
Does your trust serve a special purpose?
A trust’s purpose often determines its situs. “Dynasty” trusts, for example, attempt to minimize the impact of estate taxes over many generations. They exist in US states where there are no local estate taxes and few, if any, rules against “perpetuities.” That is, laws which limit the number of years they can exist.
Similarly, “asset protection” trusts require debtor friendly jurisdictions like the “Cook Islands.” There are also US states known for favorable asset protection laws, which have given rise to “domestic asset protection trusts.” To learn more about them in general, click on 5 Problems with Domestic Asset Protection Trusts.
Does your trustee administer “specialty” assets?
Specialty assets include real estate, private or closely held companies, loan receivables and oil, gas, and mineral interests. Not all trust companies handle them, which reduces (but does not eliminate) your options as you evaluate successor trustees.
Answering the preceding questions will help you understand your options and plan your search for a corporate trustee that fits your needs. Before you make changes, however, consult your trust-and-estate attorney.