As a financial planner, I am on the front lines to my clients’ interaction with money. I see the challenges my clients face as they receive inheritances and administer family trusts, and these wealth transfer challenges are breaking families apart.
While parents believe the family will save money and garner peace of mind by choosing one of their children or family members to act as trustee of their trust, in reality, they are setting their loved ones up for rancor and hostility over each beneficiary’s rightful share of the family fortune.
I reached out to a highly respected estate planning attorney in San Diego, Dawn Hall Cunneen of Cunneen Booth LLP for her solution on how to avoid this unintentional consequence of passing wealth to your loved ones. Just by taking one simple step you can save your family from potential destruction.
What is this family saving solution? It’s choosing a private professional fiduciary as successor trustee of your trust, rather than a child or family member.
By bringing in a third party, a fiduciary, to act as trustee, trust administration runs smoother, is more transparent, and removes family members from the front lines of the administration. We are NOT talking about banks as fiduciaries here, but rather private professional fiduciaries.
As financial planners, we suggest our clients create trusts to protect their hard-earned assets from the costs of probate administration or court-supervised conservatorship proceedings, and to put in place a mechanism for honoring their wishes when they can no longer make their own decisions or die. But choosing who to administer the trust, to act as successor trustee of the trust, can upend the best laid plans. Many people choose a child or family member to act as trustee. They do this because they want to save money by not paying a professional trustee, and they get peace of mind by choosing a family member to execute their wishes. But laypeople can make a mess of a trust administration, and choosing one child over another child to serve in this role can lead to friction when it comes to administering the trust.
They also inadvertently setup family members for failure. Family member trustees don’t have the knowledge of licensed professional fiduciary trustees. A licensed professional fiduciary is trained to administer trusts, is familiar with statutory deadlines and knows the administrative process first-hand. Lay people just don’t know these things. When a loved one passes, there are deadlines that are hard and fast, regardless of whether you may be grieving. While it’s understandable that it will be difficult to focus on the necessary deadlines or paperwork to administer a trust, the law doesn’t care – or provide any slack for laypersons.
There is a process for trust administration that must be adhered to regardless of the trustee’s personal circumstances. For example, regardless of the trustee’s relationship to the person creating the trust, the law holds all trustees to the same fiduciary standard. If you name your child as successor trustee, then the beneficiaries and the court will hold your child to the fiduciary standard and will not take into account that your child didn’t even know the standard existed! Just because you are a child of the deceased doesn’t exempt you from the level of care you are required to exercise when administering a trust. This exposes your family member trustee to potential court sanctions for failing to meet the fiduciary standard – which is most likely a standard they didn’t even know exists!
Family member trustees often learn about the fiduciary standard the hard way. Dawn mentioned that months after a death has occurred, a family member trustee may contact her office with the simple goal of determining how to access the decedent’s accounts. After further discussion, it is discovered that the family member trustee has missed all statutory deadlines, e.g., depositing the will with the court within 30 days of date of death and serving notice on trust beneficiaries and heirs within 60 days of date of death, to name just a few deadlines, and has failed to give all statutory notices to government agencies within the time prescribed by law. A family member trustee suddenly learning that they failed to meet the fiduciary standard creates distress for the family member trustee and injects chaos into the administration.
When should a child be chosen as trustee?
The optimal situation for naming a child as a trustee is when you have an only child, with no children of their own, who is detail oriented, committed to working with competent legal counsel to guide him or her through the administration process, and who’s career and life circumstances allow them sufficient time to wind up someone’s entire financial life. It’s understandable that parents prefer designating a child as a trustee, and it can provide a lower level of stress for the parents. But it is a rare occasion when choosing a child over a professional fiduciary will make sense.
So, why choose a professional fiduciary?
•Because naming a professional fiduciary as your successor trustee will save money for the estate.
For one, legal fees will be lower. May not seem like it makes sense, because professional fiduciaries receive a fee for their work, but attorney’s fees tend to be lower because professional fiduciaries will often serve notices, and complete other tasks at their rate, which is typically lower than the attorney’s rate. Paperwork is in order, deadlines are met, attorneys are provided what they need when they need it. This results in the attorney devoting less time to your administration. Less attorney time means lower attorney’s fees.
It is not uncommon for family member trustees to inadvertently increase legal costs. For example, an estate planner shared a story of a client who, after 5 meetings, still had not produced complete copies of trust account statements. The parents chose their son as the successor trustee. The son had no prior trust administration experience. Between repeated meetings and communications with the client, legal fees added up, and in the meantime, the son missed deadlines, his sister became suspicious due to the lack of information and filed suit against him! The son’s lack of trust administration experience and knowledge cost the estate time, money and, most sadly, cost the brother and sister their lifelong relationship.
•Because naming a professional fiduciary as your successor trustee will preserve family harmony.
Some parents may choose one child to act as successor trustee of their trust. This makes a statement to other children when one child is chosen over the others. Recently, one of our clients had an issue with his mother naming a sibling as trustee of their mother’s trust. The sibling not chosen as trustee accused the trustee/sibling of improper dealings, even before the mother passed away. As a result of this conflict, the mother added a second child to serve as co-trustee, but given the recent behavior of the original trustee, and lack of transparency around behavior regarding the trust, it can be assumed that there will be challenges administering the trust. Hostility around the inheritance has already begun, and they haven’t even gotten to the point of trust administration.
Many challenges face families who think the answer is choosing siblings or family members as co-trustees. For example, both trustees are required to sign all documents, attend all meetings, and, perhaps, most difficulty, agree on all decisions. Because a trustee is a fiduciary (held to the highest standard under the law) if one co-trustee does something underhanded, or just incorrect, the other non-participating trustee may be liable for the participating trustee’s acts. In the 27 years Dawn has been an estate attorney, she indicated that it is a rare situation indeed, where lay persons serving as co-Trustees results in a smooth trust administration.
It’s important to know that all professional fiduciaries are not created equal. Dawn emphasized the importance of checking credentials and references before choosing a licensed professional fiduciary. Dawn also emphasized the importance of considering the composition of your asset base when choosing a professional fiduciary. For example, if you own substantial real estate holdings, then you will want to hire a fiduciary with considerable real estate experience – such as someone with a real estate brokerage background. Most fiduciaries charge an hourly rate for trust administration, with no fees paid until they begin working (typically after the incapacity or death of the trustor.)
In summary, choosing a successor trustee to administer your assets and implement your wishes during a time when you can no longer speak for yourself, is an important and difficult decision. It is important to realistically assess the capabilities of family members and their relationships before making your decision. Dawn encourages all individuals creating a trust to consider the option of designating a licensed professional fiduciary as trustee and interviewing 2 or 3 fiduciaries before making such an impactful and significant decision.
If you’d like to learn more about how we help female business owners create their wealth, and plan ahead for their wealth transfer, please contact us.
