Upon the initial trustee(s)' disability, legal incapacity, resignation or death the successor trustees manage the trust assets in the best interests of the trustor(s), who are the initial beneficiaries of the living trust.
Doctors or judges determine legal incapacity. A trustee who begins having memory troubles may choose to temporarily resign by writing a note and notarizing it.
When the successor trustee arrives at a bank with a physician's note of incapacitation / resignation or death certificate along with a valid identification, the bank will match the information with their records of the successor trustees and let the successor trustee take action.
Successor trustees act more like a bookkeeper than a financial guru. While successor trustees may make some financial decisions, most tasks involve:
- Collecting and managing assets
- Paying debts, taxes and expenses
- Allowing for early distributions to young beneficiaries or their guardians for health, education, maintenance or support needs
- Distributing the balance of the trust assets to the named beneficiaries
Collection and management of the trust assets will require successor trustees to obtain the appropriate documents such as death certificates to forward to banks, life insurance companies, investment companies and any other institutions that may hold trust assets.
Should your successor trustee desire, most living trusts allow for the hiring of a professional estate bookkeeper or accountant with trust covering any fees.Successor Trustees
Most people list two to four successor trustees when creating a living trust but the successor trustees do not act all at once. Often, a first successor trustee or two first successor co-trustees are named. Upon an incapacitation, resignation or death, a second or replacement trustee will be next in line to serve.
The decision to list trustees individually or as co-trustees can be based on a number of factors:
- The abilities of the successor trustees
- Whether a successor trustee might prefer to work alone
- Whether a successor trustee might prefer assistance with various tasks
- Whether the trustor wants two successor trustees to serve as a "check and balance"
- If the living trust is created for a blended family, perhaps one child from each spouse's previous marriage would serve as a successor co-trustee
Selecting successor trustees is one of the most important decisions in an estate plan. Consult an estate planning professional for guidance.Corporate Trustees
A common occurrence for trustors is a lack of viable family or friends to serve as successor trustee. Corporate trustees are an alternative, as they are businesses experienced in living trusts and handling estate management and transfer.
There are advantages and disadvantages of using a corporate trustee. Family or friends, by knowing your values and intentions, may do a better (or worse) job distributing assets to young beneficiaries for reasonable health, education, maintenance and support needs. The individual may also be more aware of the young beneficiary's true motives when making a request.
A corporate trustee will tend to be more experienced and equipped to deal with situations that arise when an estate is being transferred. They typically have legal counsel and accounting staff ready to take action when necessary.Compensation
Most living trusts include language allowing fair and reasonable compensation that does not exceed the customary charges of corporate trustees in the same locality for similar services. Successor trustees are also reimbursed for any expenses incurred.
Family or friends acting as successor trustees may opt not to be compensated for their services, but a corporate trustee will have a published schedule of fees, typically charging 1%-4% annually of the net estate while their services are used.
If beneficiaries of the estate believe the successor trustees are overpaying themselves, beneficiaries have the option of demanding all accounting and can present this information to a court.
Guide and Checklist
*** The information below is solely to help those creating a living trust better understand the tasks involved for those under consideration as their successor trustees. This guide is NOT legal advice. Consult an estate planning professional for legal advice and guidance.Initial Tips
- To prevent you from being liable of the trust's obligations, always add the word "Trustee" after your name when signing for the trust.
You are legally required to follow the trustor's instructions to the best of your abilities. You are not judged by the performance of the assets, only by your conduct. Your conduct is based on what a reasonable person would do in a reasonable situation. Keep accurate records of all transactions. Make conservative decisions and don't be afraid to use advisors.
The trust has explicit instructions to be followed. The state the deceased resided in covers areas not spelled out in the trust. Common law decisions from the state Supreme Court and Court of Appeals can help provide guidance on how to proceed in unusual situations. Consult a legal professional if you need assistance with the trust's instructions.
Treat all people named in the trust equally and with respect.
Trusts typically indicate how successor trustees are compensated and there are federal guidelines.
Hire professional help if needed, such as accountants, financial advisors and attorneys. The trust will pick up the cost.
You can resign as successor trustee. It is likely successor trustees are listed after you. If not, a new successor trustee can be elected by the beneficiaries or a court.
Example: For trust transactions, John Smith should sign his name
"John Smith, Trustee"
During Incapacitation or Resignation
What to Understand
- Successor trustees act like financial powers of attorneys. They have control of all trust assets and must act only in the trustor's interest, not beneficiaries who may inherit the estate when the trustor passes.
- Once the initial Trustee is healthy again, you become inactive.
Initial Things To Do
- Ensure the trustor is receiving quality care.
- Contact family members, employers and friends.
- Get copies of health care power of attorneys and directives to the primary physician.
- Get a note of incapacitation from the doctor(s) or note of resignation from the initial trustee(s).
What To Do Next
- Review the trustor's insurance coverage and limits for health, disability and long-term care policies.
- Search for a list of assets and liabilities. Gather all financial statements, insurance information and property deeds.
- Apply for disability benefits through the trustor's employer, social security, private insurance and veteran's services.
- If there are dependents, you will need to look after their care. A court may appoint a guardian if the incapacitation will be lengthy.
- Contact the preparer of the trust or similar advisor for additional advice.
- Pay the bills. Identify bills / payments payment due dates.
- Keep track of all medical expenses during the Trustor's incapacitation.
- Keep accurate records of all your activities.
- Prepare and file tax returns by April 15th.
- Pay property taxes.
After The Trustors Pass
What to Understand
- Successor trustees act like an executor of a last will and testament. However, if all assets are in a trust or list beneficiaries, the court process of probate is avoided allowing you to work at your own pace.
- Repay all estate debts prior to distribution. Otherwise creditors can reclaim money from beneficiaries, which causes more problems if money is already spent.
- Once the trust has been distributed and accounting is wrapped up, your job is finished. Some trusts hold inheritances for young beneficiaries or maintain residences for a surviving spouse/children, in which case you remain the Successor Trustee until all the trust's tasks are completed.
Initial Things To Do
- Order at least 15 death certificates. These can take over a week to receive and will be needed for many steps. Death certificates are available in the state the death occurred.
- Contact the family, beneficiaries and other successor trustees asking if they have any questions as you begin handling the estate.
- Keep accurate records of final medical and funeral expenses.
- Search for a list of assets and liabilities. Gather all financial statements, insurance information and property deeds, including values at time of death.
- Make sure anything of value is insured otherwise you may be personally liable. Start by contacting the Trustor's insurance agent.
- Estimate the estate size. Estate taxes are due on estates valued past a state or federal limit. These limits change over time. Research current estate tax limits and contact a professional if this threshold may be passed.
- Read the trust and other related documents. Power of Attorney documents are only useful during the Trustor's lifetime so ignore these documents.
- If probate is needed for assets outside the trust, contact the executor / personal representative (you are likely serving this role as well - read the will).
Once you have death certificates
- Be ready with your ID, death certificates and a copy of the trust.
- Collect payouts from life insurance, IRAs, 401k's and other assets listing beneficiaries. If beneficiaries are named on policies, this money may be immediately distributed. If the trust is the beneficiary, deposit the payout into a trust bank account - this money may not be distributed until all debts, liabilities and taxes are paid.
- Pay all debts & liabilities. Contact credit card companies, lenders for updated balances. Debts are typically not in the trust's name. Debts are found in the deceased's name.
- No need to pay off a mortgage balance if a property is being solid but continue cutting checks for monthly mortgage payments, real estate taxes and insurance on the property.
- Prepare and file final tax returns.
Things Not to Do
- Prior to distribution, do not combine trust assets with your own.
- Prior to distribution, do not use trust assets for your benefit unless explicitly directed by the trust.
- If you are managing financial assets, do not make risky investments.
- Do not undertake any step you are unsure about doing. Get professional advice or assistance.
- Gather all information including assets inventories, accounting and taxes and prepare copies for the beneficiaries.
- Ask the beneficiaries to sign a document approving your accounting, waiving any claims against you and promising to pay any trust expenses that arise after the beneficiaries have received the trust's assets.
- Most trusts have No Contest Clauses disinheriting anyone legally challenging the trust. This clause should make your job easier.
- To settle disputes have beneficiaries prioritize items they would like to inherit.
- Some assets may need appraisal for settling disputes, an estate sale/auction or estate tax calculations.
- Making distributions to young beneficiaries could be one of your biggest responsibilities. Most trusts restrict access to beneficiaries until they meet certain requirements, such as age. Distributions can be made prior to this age by the Successor Trustee for reasonable health, education, maintenance or support needs.
Some requests, such as doctor's visits and school supplies, are easy decisions to make. Other requests can be more difficult so ask the Trustor before they pass for examples, such as requests for:
- A couple hundred dollars for a trip to Disneyland for a child or backpacking across Europe for a recent grad qualifies as mental "health".
- Money for a used car to get to and from a new job or money for a down payment on a house qualifies under maintenance or support.
- Out-of-state / out-of-country tuition under "education".
Successor Trustee Accounting Tips
- Consult an accountant or CPA for advice. This guide may not be comprehensive depending on the year the trustors pass.
- Prepare an annual accounting report for the other successor trustees and beneficiaries. Allow them to ask questions.
- Inventory all trust assets, including approximate values, insurance information and relevant information.
- Gather statements for all trust bank accounts and investments.
- List debts of the trust.
- List claims to the trust and what actions the trustee has taken.
- List disbursements from the trust including whether the disbursement came from principal or income.
- Gather all receipts.
- Gather all tax statements.
- Provide details of the trustee's compensation and the method used to calculate the compensation.
- Successor trustee should have the beneficiaries sign receipts of a) distributions and b) accounting reports.