May 29, 2020
Investing Fundamentals For Young Adults: Understanding Risk
By taking the time to understand the full scope of the potential risks and rewards of an...
Kimberly Dwan Bernatz
February 19, 2020
Over the next 25 years, 45 million U.S. households are expected to transfer $68 trillion to the next generation, according to Cerulli Associates. Given the wide use of trusts for estate planning purposes, it’s not surprising that the largest generational wealth transfer in history has resulted in increased trust litigation particularly surrounding the role of successor trustees.
A successor trustee has a fiduciary responsibility to administer and settle a trust after the trustee dies or becomes incapacitated. Successor trustees can be family members of the trust maker, a trusted advisor or corporate trustee (a bank or trust company).
When a successor trustee fails to perform his or her duties it often results in legal intervention. Fortunately, this can usually be avoided with proper planning and due diligence.
Many successor trustees believe their fiduciary responsibility is to the trust creator. In fact, they are required to act in the best interests of the trust beneficiaries. To avoid the conflicts that often ensue, it’s wise to detail the successor trustee’s duties within the trust documents. In addition, some education may be needed to ensure they understand (and accept) their responsibilities.
Many trust litigation cases result from disagreements and hostility among family member co-trustees. Parents who anticipate the possibility of conflict among their adult children should consider naming an unbiased third party to serve as successor trustee.
Individuals and families may have multiple advisors guiding them through the estate planning process. Oftentimes, the successor trustee is unaware of these relationships and fails to coordinate with them when the estate is settled. To prevent miscommunications that can lead to inaccuracies and financial loss, the grantor should introduce all trustees and advisors at the outset of the relationship.
Naming family members as successor trustees can result in biased decision-making. To ensure the trustee acts in accordance with the grantor’s intentions, it can be helpful to appoint an objective third party.
Depending on state laws, modifying an irrevocable trust can be difficult—and potentially impossible—once the grantor dies. In California, the process is more navigable, especially if the trust’s beneficiaries unanimously agree to the trust being amended or terminated. Nevertheless, legal involvement can be time consuming and expensive. One way to avoid this is to name a trust protector, whose sole purpose is to remove an unsatisfactory trustee on behalf of the beneficiaries when necessary.
Choosing the right successor trustee is a decision that shouldn’t be taken lightly. With proper communication, education and documentation, it’s possible to avoid many of the mistakes that often cause trust beneficiaries to seek legal intervention. In addition, selecting an unbiased third party like a corporate trustee can eliminate these common setbacks.
Kimberly Dwan Bernatz, CFP®, AEP® is head of CIBC Private Wealth Management’s Newport Beach office, team executive and business development officer with more than 20 years of industry experience. In this role, she leads the client service team and the firm’s business development efforts in the Pacific Southwest.
The Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S.
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