By Alan G. Orlowsky, J.D., C.P.A.
You are asked to serve as successor trustee for your brother Albert’s trust. That means that if Albert and his wife Betsy are unable to fulfill the role as primary trustee — or they both die before you do — then you would become the trustee. In that role, your job would be to manage the trust assets, distribute funds to the beneficiaries, and file annual reports and tax returns. In the remote chance that Albert and Betsy’s three young children become orphans, you would also need to address guardianship issues.
Of course, you are honored to be chosen by your brother. Will you accept the responsibility?
Whether the maker of the trust (grantor) is your sibling or another family member or close friend, before you decide to serve as trustee or successor trustee, you should be aware of the considerable work involved and the expertise that’s required. And we’re not just talking about the bare-minimum list of duties that you will have to perform, but what it takes to whole-heartedly and thoroughly fulfill your commitment.
While you are not required to read the trust before (or after) accepting the job, it might make your job a lot easier if you do take the time now to understand the trust’s language and the grantor’s intent. In many cases the grantor’s instructions are ambiguous or unclear, making it difficult for the trustee to administer the trust, and resulting in disputes between beneficiaries and the trustee — and sometimes between the trustee and other family members.
For example, one client stated in her trust that money should be allocated to her alcoholic niece for healthcare, education, and reasonable support, but only if the niece quits drinking. Does that mean the niece must never touch another drink, does it mean the niece must enroll in a substance abuse program, or does it mean the niece must be sober enough, in the opinion of the trustee, to use the funds wisely?
When the trust is specific, it is easier to administer — and it can be readily enforceable in court. Review the trust document and ask the grantor (and/or the grantor’s lawyer) to clarify any confusing provisions.
Upon the grantor’s death, you should read the trust carefully, whether or not you have previously done so, to become familiar with your powers, rights, obligations, and duties, especially with respect to the distribution and management of trust assets. At this point, any confusion would have to be cleared up with the assistance of a lawyer. Typically trusts are written pursuant to the Trust and Trustees Act of the state in which the grantor lived, and any disputes about your duties as trustee would be resolved according to the Act.
Your first responsibility will be to administer the post-mortem trust estate. This may include locating and inventorying all trust assets, filing estate tax and income tax returns and paying tax liabilities, collaborating with the executor to marshal probate assets through the court, and — most importantly — working with the guardians of surviving children to provide for their support, housing, supervision, education, and medical care. In addition to legal advice, in fulfilling the trustee’s role you may need to engage the services of an accountant, banker, investment adviser, and social worker.
In managing the trust assets, it may be necessary to hunt down titles to real property, assess the value of real estate or a business enterprise, transfer funds from one account to another, and allocate assets to new testamentary trusts created at the grantor’s death. Indeed, the tasks are many.
Once you have the trust assets organized, you must then invest the funds in accordance with the terms of the trust. You must be sure that investments are made in a way that best provides for the beneficiaries’ ongoing support (such as monthly rent and health insurance premiums) and future needs (such as college tuition). You’ll have to take into account the grantor’s wishes, which you may have to interpret subjectively when planning your investment strategy. Unless you are a professional money manager, you may want to hire one.
You must also make sure yearly financial reports and income tax returns are prepared for the trust. The trust income tax rules are complex, so hiring an accountant is strongly recommended.
Up to this point, you’ve probably engaged the services of a few professionals, worked with guardians and executors, counseled the beneficiary, and maybe dealt with some prying relatives. Your most difficult job is still to come, though: the administration and distribution of trust assets, perhaps over a twenty-year period or longer. Doing that while trying to maintain warm relationships with beneficiaries, as well as family harmony, takes diplomacy and compassion.
Along the way, if the beneficiary wants extra money from the trust, he or she will apply to you for it. Some requests will be reasonable, some frivolous, some outrageous. As children grow up they may ask for questionable living expenses, automobiles, and motorcycles, start-up capital for risky business ventures, exotic vacations, and worse. As a trustee, you will have the difficult job of sometimes saying no and incurring the beneficiary’s ire — and possibly facing a lawsuit. On the other hand, if you say yes to the beneficiary you might incur the wrath of the guardian or another relative. You can’t always please everyone.
Serving as a trustee certainly has its rewards. There’s the satisfaction of faithfully carrying out the wishes, and earning the gratitude, of the grantor, who is likely your very close friend or relative. You might find joy in helping to provide for and mentor the grantor’s children. You also are entitled to reasonable monetary compensation for your time and efforts, although you won’t be unduly enriched.
But before you accept the role of trustee, think about whether you are capable of performing the duties and willing to take the responsibility seriously. Your brother Albert will thank you for your careful consideration, even if you say no.
In most cases, the grantor of a trust is best served by appointing an institutional trustee, because financial institutions are better qualified to perform the many and complex duties involved. Nevertheless, it is quite common for the grantor of a trust to invite a close relative or friend to serve as the trustee. If you receive such an invitation, think carefully about (a) your ability to assume the responsibility and (b) whether the grantor would be better served by an institutional trustee. If you still need a couple of good reasons to say no, here they are:
Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for over 30 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.
Updated September, 2019