For any corporate trustee you choose, there should be some minimum requirements, and it’s best to check its reputation ahead of time to find out if its trust relationships end amicably.
Originally published on Kiplinger.com December 5, 2022
There are many reasons that you may use a lifetime and even a generational trust to manage the assets for your family and descendants. Most families have found that hiring a trust company (sometimes called a corporate trustee or institutional trustee, including a bank or other financial institution with trust powers) as the independent trustee best provides the necessary administrative services in a consistent and economical manner for such a long-term commitment.
There should be a few minimum requirements for any corporate trustee you select. For our purposes here, a “qualified trustee” is defined as a financial institution with trust powers; a dedicated administrative team; investment expertise; and the capacity and willingness to manage real estate, retirement accounts, business interests and other alternative assets. Including these kinds of prerequisites for any successor corporate trustee may reduce issues caused by inexperienced trust officers.
Questions When Drafting a Trust Instrument
If a related individual trustee is also important to you (such as the beneficiary, a parent or guardian, or other interested person), trust instruments commonly require that the corporate trustee and the individual trustee act unanimously. This arrangement does not alter the need for thoughtful choices in drafting the trust, and there are alternatives that you may find more desirable.
What if, for instance, you want an individual trustee to serve, but also want the administrative and investment expertise of a corporate trustee? Rather than appoint them as co-trustees, your trust may allow the individual trustee to select any corporate trustee, remove and replace it without cause, and exercise a power to expand or limit the trust powers granted to a newly appointed corporate trustee. This can also apply to the currently serving corporate trustee with its consent; if the corporate trustee will not consent to such a change in powers, it may resign, or the individual trustee may remove it.
When Bigger Isn’t Better
In addition to the terms above for the “qualified trustee,” there can be other requirements for the successor corporate trustee. Many trusts assume that a larger organization is always the best option. But a more local and smaller organization, including one with local trust decision-makers, may be a better fit for a trust that will primarily manage an investment portfolio of marketable securities and has mostly local beneficiaries.
Evidence of this bias toward “bigger is better” is the use of a very high “capital and surplus” requirement for the successor trustee. This amount is usually stated as a minimum, anywhere from $1 million to hundreds of millions, and is used as a barometer measuring the trustee’s ability to provide restitution if necessary. If the minimum is set too high, you will rule out smaller trust companies that do not own substantial assets, like buildings and branch offices.
For instance, a trust company with as much as $30 billion under management may have a capital and surplus of under $20 million.
A better way to ensure a properly prepared trustee may be to require that the trustee have all the characteristics described above and administer combined trust assets that are at least 1,000 times your trust’s corpus (a $2 million trust may require the trustee have assets under management of at least $2 billion).
Removing a Trustee
Trusts often state that a majority of the adult beneficiaries may remove the trustee without cause. I think this option is quite beneficial when there are multiple beneficiaries living under different circumstances. But possibly there is no need to require cause to replace a trustee if more than half of the beneficiaries agree that a change is necessary.
However, if the trust benefits a single person and the grantor established the trust primarily to protect the assets from waste or to limit the beneficiary’s access to funds, then a requirement that he or she show cause before removing the trustee makes sense. You may also appoint some other person or committee to decide when a trustee should be replaced.
Now, what trouble may the outgoing trustee cause? Mostly, it is delays, but it can be legal fees, too. It may take weeks or months to settle the issues that led to the removal of the trustee. The outgoing trustee may also delay transferring the trust assets or ignore requests for information regarding them.
It seems plausible to expect the court to sanction an intentionally hostile outgoing trustee, but that is a rare occurrence limited to the most egregious cases.
How to Handle an RIA Request
Another irritant is the manner in which the outgoing trustee obtains finality on any unresolved beneficiary complaints, such as a requirement for a Release and Indemnification Agreement, or RIA.
If there is already animosity between the beneficiary and the trustee, it doesn’t help matters for the trustee to demand that the beneficiaries execute an RIA that releases the outgoing trustee from liability for all its actions in relation to administration, investments and fees, with terms that the trust, the new trustee and all the beneficiaries indemnify it from any losses and its costs in relation to a cause of action brought later.
The result of this language is that the beneficiaries may be barred from seeking restitution for a breach that is discovered by the successor trustee, for instance, and if they are not barred, then any costs to the outgoing trustee in relation to this litigation may be charged to the trust or to the beneficiary.
Often, the outgoing trustee will offer the RIA in exchange for not expending trust assets to file a formal accounting with the court. The beneficiaries then have a choice: They can sign the release and more quickly transition to the new trustee, or they can require that the outgoing trustee file its accounting so the beneficiaries may bring their objections to the court for resolution.
If there are no substantial objections to be heard, then simply signing the RIA may make sense. After all, once the court approves a formal accounting, the court will typically release the outgoing trustee from liability for any yet undiscovered breaches (although there is an exception if fraud is alleged with some substantial evidence).
Navigating State Statutes
Some state trust codes include a statute that provides that the trustee may submit a final informal accounting to just the beneficiaries without court supervision. The beneficiaries then have 45 days to file an objection with the trustee. The trustee must attempt to resolve the objection, and only if the parties cannot agree on a proper resolution does the beneficiary petition the court for relief or the trustee petition the court for guidance. But, if no objections are submitted, at the end of the 45-day period, the trustee is released from any and all liability forever absent substantial evidence of fraud.
In a jurisdiction that has such a statute, the trust may benefit by a requirement that this process be followed. If the law controlling the trust has no such statute, then the trust may be drafted to include similar language controlling the outgoing trustee’s final accounting, but in any case, the outgoing trustee may always opt to file a formal accounting with the court.
You should be aware that if a breach of trust is suspected, or there is some other objection to a trustee’s investment choices or distributions, the beneficiary should bring such charges to the trustee as soon as possible.
Many states (and many trust instruments) allow the trustee to file an annual accounting with a 30-day objection period. If no such objection is brought, the accounting is considered accepted, and the trustee cannot be held liable for any loss that occurred during that period usually absent a showing of actual intent to defraud.
Therefore, it is worthwhile when selecting a corporate trustee to check its reputation for ending a trust — are relationships ended amicably or with some animosity? I’ve heard that parties to a divorce are generally good people on their worst behavior; ending a fiduciary relationship shouldn’t be a divorce.
Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, 2016 Bingham Fellow, a board member of the Metro Louisville Estate Planning Council, and is a member of the Louisville, Kentucky and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Program Planning Committee.