When is it worth paying for a professional successor trustee?

To start, it can be useful to have a basic understanding of what a successor trustee is and the purpose this important role serves for your trust.

A successor trustee is the person or entity who will become trustee for a trust when the initial trustee (known as the grantor) is no longer able to do so. This authority is immediately given to the successor trustee in the event that the initial trustee becomes incapacitated, meaning they are unable to make or communicate decisions. The successor trustee also takes over as trustee of a trust when the initial trustee passes away.

In general, a successor trustee has the authority to manage trust assets and make distributions to beneficiaries. Consequently, a successor trustee tends to have the same kinds of powers as the initial trustee, which is often the person who set up the trust - the grantor. However, the trust may delineate which powers are given to the initial trustee and which powers the successor has, especially if they differ.

For example, the initial trustee may wish to retain the right to amend a revocable trust in all ways, but they may wish to limit the successor trustee's amendment authority regarding certain items, like beneficiary selection.

Overall, an ideal successor trustee is trustworthy, dependable and competent. While it's a plus to have experience in finance, it's not a requirement. It's also helpful to have your successor trustee be located nearby, or at least within the same state. As this person or company will likely have expansive authority over your trust, it's important to choose the right trustee in whom you have complete faith.

When deciding who to name as your successor trustee, you may consider two different options: a known person (family member or friend) or a professional.

A professional successor trustee is a person or corporation who is paid to act as trustee of a trust. With a corporate trustee, this usually means naming a bank trust department or a trust company to serve in this capacity.

If you opt not to use a professional trustee, then a family member or friend typically must be named as successor trustee. This can be a spouse, adult child, other relative or a trusted friend.

If you were to choose a professional trustee as your successor, there are certain advantages to this decision. Primarily, this kind of arrangement can help to prevent discord within a family, especially with blended families where adult children may have differing preferences as to whom they would like to see serve as successor trustee.

For example, consider the following situation. Matthew and Ada are a married couple. They both have been married previously and have children from those marriages. After Matthew passed away, leaving all of his assets to Ada, she then seeks to create a revocable living trust with assistance from her attorney. Ada has two adult children who live in another state, while Matthew's two adult children live nearby.

Ada's children prefer to be named co-successor trustees to her trust and her agents for financial and medical decisions. However, Ada's stepchildren, with whom she has remained close, make more sense logistically and are also willing to serve. Ada's children and stepchildren all are financially experienced, so that consideration does not weigh more favorably for one set of children or the other.

Ada, who needs to be comfortable and confident in her decision, is considering naming a neighbor who is a certified public accountant as her financial agent. She doesn't want friction among her survivors, and she feels that having out-of-state successor trustees is not the best decision.

In this circumstance, Ada might choose her neighbor as her successor trustee instead of any of her children or stepchildren to avoid conflict between them.

If you have a similar situation, or if you do not have adult children or loved ones whom you can trust to take on this important role, then a professional successor trustee could be the right choice for you.

The main disadvantage to naming a professional successor trustee is simple: cost.

If you were to name a family member or friend as your successor trustee, then your administrative expenses can be kept to a minimum. On the other hand, professional trustees often charge high expenses to take on this responsibility. For example, in Ada's situation, the neighbor would likely charge a substantial hourly fee for any work that she does managing and administering the trust. These costs can be even greater when you choose a corporate trustee, like the trust department of a bank or a trust company.

As mentioned above, a professional trustee will charge expenses for administering the trust and managing the trust assets.

With an individual, like the neighbor CPA in Ada's example, the expenses are likely going to be based on the time spent providing services for the trust. Any time they spend on trust administration will be charged to the trust at their hourly rate. Hourly rates for individual professional advisors vary widely, and even if you know the person's current hourly rate, that will likely increase over time to an unknown amount when they take over as successor trustee.

While some professionals charge as low as $100 per hour, some charge upward of $500 per hour, or more. Choosing someone you trust to charge a fair and reasonable rate given the value of your trust assets and the amount of work you anticipate being involved will be important for deciding who to name as your successor trustee.

With a corporate trustee, the cost of management is usually a set amount. This annual fee is typically around 1% to 3% of the value of the trust assets. Some individual professional trustees use this method of calculating fees as well.

As an example, if you have a trust with $1 million worth of assets and your professional trustee rate is 2%, then your trust will have to pay that trustee around $20,000 per year for their services.

Regardless of whether you select an individual or a corporate professional trustee, the rate must be reasonable given the circumstances and complexity of the trust management. By working with an experienced Legacy Plan Network Attorney to craft your trust and select your professional trustee, if preferred, you can have a clear understanding of what a fair rate would be considered in your specific circumstances and in your location.

Aside from the costs, another consideration to keep in mind when deciding between a family member and a professional trustee are the requirements and practices of a professional trustee, particularly a bank trust department or trust company.

Most national banks have minimum estate size requirements that must be met in order for them to be willing to serve as successor trustee. For some of the most well-known banks, this can be $5 million or more. As a result, if the value of the assets held in your trust are unlikely to meet or exceed the bank's threshold, then you likely will want to select another trustee, as they will reject the role if named in your trust documents.

In addition, most banks have standard procedures that they follow for asset management after the initial trustee passes away. Unlike a family member or perhaps an individual professional trustee, a corporate trustee may as a standard practice liquidate the estate upon the initial trustee's passing. This means that your primary home, family vacation home, classic car and perhaps other sentimental items in your estate could be immediately sold after your lifetime. A family member or individual, on the other hand, may take more time and care to settle your trust and distribute items to your beneficiaries instead of liquidating them all.

As a result, if you would like to have more flexibility for your trust administration, especially after your lifetime, then a corporate successor trustee may not be the right choice for you.

As mentioned previously, one of the main benefits of using a loved one as your successor trustee is the cost savings. While a family member or friend would still be permitted to receive a reasonable fee for their services, it likely would be much lower than either an individual professional trustee or a corporate one.

In addition, a bank trust department may be unwise for anyone whose estate is of a more modest value. If you do not believe that your estate will meet that $5 million threshold requirement to warrant corporate trustee services, then a loved one could be a much better option. This is not only because you will have the peace of mind that your chosen successor trustee will eventually take on this role, but also because it will mean preserving more of your wealth for your beneficiaries versus being expended on substantial annual management fees.

Finally, your family member or friend may be able to provide more personalized services for your trust. Unlike a corporate trustee with specific settlement procedures, your loved one may have more freedom and ability to tailor the trust administration to better meet your needs.

Aside from the obvious issues that arise when you do not have someone you can trust to serve as successor trustee, the main downside of choosing a loved one for this role is the potential for intrafamily conflict.

Especially with blended families like Ada's, or with families where there are several adult children who think they should be named successor trustee, there is huge potential for family members to be hurt or angry about a parent's decision in this regard. While this is often not intentional, the feeling of being overlooked or judged to be incapable of taking on such an important role can lead to resentment toward the person chosen.

However, this doesn't necessarily have to be the case, even if you are in a blended family or have several family members willing to serve as your successor trustee. One of the best ways to avoid this kind of outcome is through adequate communication before the need for a successor trustee arises. By addressing the “elephant in the room” and explaining your rationale to your loved ones, you can help to minimize the ill will that could result otherwise.

This is especially useful if the adult child you chose is already perceived as the “favorite” of the family. By telling your other children the logistical reasons for your choice (e.g. proximity, experience, availability, etc.), they will be much less likely to place their own more charged assumptions on your decision in the future.

While a revocable living trust is often an excellent choice for accomplishing your goals for the future, in order to have a secure plan in place, you'll need to decide upon who will serve as your successor trustee.

A successor trustee acts as trustee when the original person can no longer serve, either due to incapacitation or death. In general, you can either choose to name a family member or friend as your successor trustee, or you can name a professional trustee, who is either an individual or corporation paid to administer your trust.

While naming a loved one is the less costly option, there are many advantages to using a professional trustee, including avoiding family conflict. However, unless your estate value is substantial, it likely would be more prudent to choose someone especially trustworthy in your life to serve in this capacity.

Either way, it's highly recommended that you work with an experienced Legacy Plan Network Attorney on this kind of matter. They will be able to craft a valid trust that achieves your vision for the future while also providing invaluable guidance on decisions like who you should name as your successor trustee to take care of your hard-earned wealth and provide for your loved ones when the time comes.