Setting up a trust requires designating an initial trustee—and should also involve designating a successor trustee.
The successor trustee takes over the responsibility of managing the trust if the current trustee dies, becomes incapacitated, or is no longer willing to serve as trustee.
Types of Trusts and Trustees
If you establish a trust in your will, it is called a testamentary trust. The trust does not come into existence until your death, so you cannot be the initial trustee.
Your will must appoint the initial trustee, but it should also provide for one or more successor trustees. Often, the executor who oversees the probate of the will is designated as the trustee, but this is not always the case.
If you create a trust that comes into existence while you are still alive, it is known as a living trust, or an "inter vivos" trust. Living trusts come in two types: revocable and irrevocable.
Most people who create a revocable living trust designate themselves as the initial trustee because a central purpose of a revocable trust is for the trust maker to retain full control over the trust assets.
A successor trustee is designated to take over management of the trust after the trust maker's death or incapacity.
Irrevocable living trusts are typically created to remove assets from the maker's possession so that the maker is eligible for certain benefits, such as Medicaid. If you create an irrevocable living trust, you cannot retain control of the trust assets. Thus, you may not serve as a trustee.
Successor Trustee Qualifications
Trusts are governed by state law. Generally, any mentally competent adult may serve as a trustee. A trustee does not need to be an attorney.
Some companies specialize in the business of serving as trustees. These are often professional trust-management companies, law firms, or trust divisions of banks. Such entities tend to be trustworthy managers, but they often charge the trust significant fees. Many people choose a trusted relative or friend to serve as their successor trustee to avoid these fees.
Several characteristics should be considered when selecting a trustee, and these also apply to a successor trustee.
- Trustworthiness. It is vitally important that your successor trustee is someone you believe has the integrity to carry out the terms and intentions of the trust faithfully. There are many cases of trustees taking trust assets for their own benefit, so select someone carefully.
- Willingness. Before designating a successor trustee, you should talk to the person to be sure they are willing to take on the responsibilities of a trustee. A trustee is entitled to be compensated for their services, though some close family members or friends may be willing to act as trustee for minimal or no compensation. You need to be sure that the person you designate is satisfied with the compensation arrangement.
- Knowledge. Managing trust assets can involve making financial decisions regarding various types of assets. It also involves filing annual tax returns for the trust. Ideally, you want a trustee who is knowledgeable about such things as real estate, market investing, and taxes. Of course, a trustee can always hire competent advisers but this will increase the expenses of the trust.
- Ability to exercise good judgment. This includes judgment in evaluating the needs and best interests of the beneficiaries, as well as good financial judgment in managing the trust assets.
- Availability. You want a trustee who will have the time to pay appropriate attention to managing the trust. Someone working 80 hours a week at their own business, or working full time and raising several children, may not be a good choice.
- Age and health. Since most trusts continue in existence for a fairly long time, you ideally want a successor trustee in good health and relatively young. To cover a situation in which the successor trustee dies or is no longer able to serve, you should also consider appointing a second successor trustee.
- Familiarity with the beneficiaries. A trustee who has some degree of relationship with the beneficiaries may be able to avoid conflicts with them. On the other hand, you want someone who can resist excessive demands from beneficiaries.
Co-Trustees and Beneficiaries as Trustees
Some people appoint two or more individuals to serve as successor co-trustees. This requires the trust document to spell out how decisions will be made in the event of disagreement among the trustees.
Sometimes trust beneficiaries are appointed as successor trustees, but this often leads to conflict among the beneficiaries. It is usually best to avoid appointing co-trustees or beneficiaries.
Appointing a successor trustee can help ensure that your trust is managed in accordance with your wishes.