Latest / The Practical Planner / How to Remove or Replace a Trustee
Transcript
- speaker-0: Modern trusts are very concerned, you know, through experience of the trust and estates industry with the replacement and removal and you know appointment of trustees. But your older trust agreements might be super simple, have nothing on this. And then all of a sudden you're looking at a court appointment. That is like the ultimate hurdle to overcome. speaker-1: All right, what is up and welcome back, everyone, to another episode of the Practical Planner Podcast. I'm your co-host, Thomas Goldman. Here with me is Ann Rhodes. And for everybody listening, this is gonna be Ann's last episode, but not like Dave, where she's gonna be gone, you know, sad about that. Ann is just gonna have a baby and she's gonna be gone for maybe a couple recordings, I would say. So we got her for two episodes that we're gonna record. Make sure you listen to them. But Ann, excited to get some more time with you. speaker-0: Thank you. Thank you, Thomas. These are ⁓ actually two topics that I really love because they come up more often than you think. People set up their trusts and then they think, ⁓ kumbaya, everybody will get along. Now what? So I'm very excited to be covering these before I go and leave. And I will miss you guys. speaker-1: Yeah, and you kind of started a little bit on the topic, but I do think, you know, it's an interesting one because we've talked about this on the podcast all the time. Hey, you know, your estate plan is a living, breathing document. You need to update it at different periods of time. But most times where that conversation goes is you moved, you got married, you know, hey, now we have property in a different state and now we need to set up a trust. It's really generally life events. We've talked some, but less about like people in your plan changes, right? This could be beneficiaries, trustees, et cetera. And so today's episode is going to be. Specifically about trustees. We're gonna go on the, you know, revocable side because generally your trustees are probably family or maybe friends or maybe kids. And then we'll also talk about the irrevocable side and and where that comes about. But ⁓ you know, when you were practicing, when would you see were common times that people wanted to update and change trustees and why? speaker-0: So the most common reasons, I mean, you can kind of imagine what they would be, you know, the trustees you picked are getting old, or trustees you didn't pick, ⁓ or people that you didn't pick as trustees are getting more mature, like your kids, and you want to add them, you know, to your document. And so it has to do a lot with just life changes, right? But it can also be because you picked corporate trustees, and the corporate trustee has know, maybe gone bankrupt, you don't like their fee schedule. For whatever reason, they're not a good fit for the trust anymore. Or the opposite, where you started out with, you know, individual trustees, family members, because you didn't have a lot of wealth, but then all of a sudden you realize, ⁓ my gosh, you know, my assets have become more complex, I've become wealthier, and I actually need a corporate trustee to step in. And now I gotta change this. So there are a variety of different reasons that people don't, you know, need to change their trustees. The very first project that I worked on, actually, as an associate when I first started in Trusts and Estates was because there was a partner at the law firm where I worked in who passed away very suddenly. And he was a very old school attorney who, you know, agreed to serve as fiduciary for 90 plus trusts for his clients, spread across, you know, his many, many years, decades of practice. And some of these clients had no idea who he was anymore. You know, they're ⁓ the kids or the grandkids of like the original clients that he had. And so when he died, you know, the law firm had to undergo this huge exercise of finding his name and where he was serving in all of these, I mean 90 plus trusts, and then having to peel back and, you know, ⁓ replace the trustee. So that exercise probably took like year, year or two. So this is a topic that I care about a lot because I think a lot of people overlook who they've appointed as their trustees until maybe it's too late, either on their end or the trustees end. speaker-1: an interesting one. Did did did the firm charge the people to make these changes or were you kinda like, This is our fault, he died early? speaker-0: it depends, right? Because this partner died without a succession plan, which was or a very limited succession plan. I think he actually just didn't have enough time to put something in place. And you know, even though he dealt with death, I think that he also, you know, you you don't want to face your death. And so, anyways, regardless, I actually don't know what the firm did as an arrangement. I imagine that if you did extra work, they would charge you. speaker-1: Yeah, that'd be my assumption too. Okay, so so we have these life events, right? Something happens, we want to change our trustee. Like what what is the process of doing that? speaker-0: So the process is very dependent on what kind of trust you have and what the trust says. So always start with a trust document, essentially. ⁓ so let's say, for example, you have a revocable trust until and you're the client who actually put together the revocable trust. You're also its grantor or set lore. So in that case, actually it should be very easy because it's a revocable trust, you're still alive, just go ahead and change it. Don't wait, you know, don't wait until you have like A critical mass of changes. Sometimes it can be as easy as just filing a one-page amendment to re-jigger the trustees that come after you. The second thing that could be an option for you too, even if you're still alive, is that usually a well-drafted document, including the wealth.com ones, have a position that's dedicated to just changing the trustee because we know how often these changes could happen. In the wealth documents, it's called a trustee appointer role. We literally just like made up the term, you know, it's like a defined term in the agreement. But in a lot of ⁓ other documents, it might be called the trust protector if your state allows for the trust protector to have this job. ⁓ or it could just be called any number of things or not have a name, but just be baked into the agreement where it just says, you know, a majority of these people can, you know, change the trustee. speaker-1: So in that situation though, does that mean like you have to actually go do it right now or it can be like, hey, if if I don't change it, that wasn't the right person, you know, we pass away and the trustee steps in or the the trustee appointer could just name somebody, or is it like you have to go make document changes and that person had the ability to do it? speaker-0: Yeah, I mean, always make the document changes while the person who made the trust is alive. It's always easier. If the person has passed away, there are many mechanisms for trustees to come in. That trustee appointer role, for example, can be filled by a succession of trustee appointers themselves. So very typical structure. Let's say, for example, you have ⁓ beneficiaries who are not very savvy with money, right? But they are going to be the beneficiaries of irrevocable trusts at your death. And so you're like, okay, I'm gonna put in place a corporate trustee. But at the end of the day, if my beneficiaries, my kids don't get along with that corporate trustee, they can change that person. So what they do, what you do is your trustee appointer might start out being you while you're alive, but as soon as you've passed away, you're like, my three kids by majority decision are gonna step in and ⁓ remove the trustee. So your succession of trustees is slightly different than your succession of trustee appointers, if that makes sense. speaker-1: Sure. So obviously like you use a wealth, it's pretty easy to make these changes. Let's say you don't. You have an attorney and you want to update your trustee. Is this something like I have to go engage my attorney to do? Is it something that I could just write on a piece of paper and go get it notarized and have two people see it? Can I use AI to help me just edit my trustee? Like, you know, what are the steps? speaker-0: Let's put it this way. ⁓ there's a lot of do-it-yourself these days, especially with AI, with especially with off-the-shelf AI, where they tell you in their terms and conditions, we don't do legal work. So that is a risk question that you have to, you know, take. You should be able to file a pretty short document. So whether or not you think the attorney should do it, because it's short anyways, and you know, why not pay versus like doing it with Chat GPT? Like That is up to your client. ⁓ but at the end of the day, ⁓ it should be very, very easy to do. The one complication is if you're firing a trustee and they are quite savvy. So let's say a corporate trustee, they may actually have your client sign off on a lot of liabilities that could have happened. And that's something where you definitely want your client to be represented by an attorney. So Let's say, for example, you have one of these large institutional banks or financial institutions with their, you know, trust company. Most likely when you fire them and there could have been tension, there could not have been tension, as they step off, they might say, You gotta release us, you know, from a fiduciary perspective on everything we did before. And here's a trust accounting for years and years that we served so that you understand what happened. you know, everybody was clear on what we did while we were trustee. And now you're saying, I made the right distributions, I made the right investments, and we walk away, you know, but you have to sign off on that liability. And so that's where I would really have your client consider having a lawyer help with. speaker-1: That makes sense. So I think you kind of open the door now to the irrevocable side of things. Cause it seems like revocable, pretty simple. Like it really is just life changes, or maybe like, hey, it was a friend. We kind of had a falling out. My parents are a little bit too old. My kids are, you know, now old enough. Or, you know, maybe blah blah blah. But the irrevocable side I think is a little bit interesting because it's kind of the wild west in my experience here. Like there are good trust companies, there are very bad trust companies. There are cheap trust companies, there are expensive trust companies, and cheap doesn't mean bad. Expensive doesn't necessarily mean good. You know, you also might have a corporate trustee and, you know, that was your parents' trust. And now it's you and you don't know the person, you don't like the person, et cetera. So, you know, how do we go about changing there? Cause in my experience, it feels like people think they're stuck. And I I don't know if that's from the language from the trustees that make it seem like you're stuck, but I I think we need to talk a little bit about that. speaker-0: Yeah. So ⁓ tr changing trust companies, when they're when the trust is irrevocable, again starts with the document. Because again, if you have a trustee appointer role and also usually it's paired with the ability to remove, that could be actually a pretty easy thing to do. Right. So again, like So no, not necessarily. Actually, so you mean the beneficiary, I think is what you mean, Thomas. Exactly. In the irrevocable c trust context, it's like you are the beneficiary of a trust. You don't get along with the person managing the money and making distributions to you, right? That's the trustee. And so that's why there's some friction and you're trying to like remove that trustee. But yes, it can be you, actually. ⁓ so there are tax reasons sometimes where that power might be a little bit limited. So for example, It might say that if you acted as the remover, you then have to appoint a trustee. Like the next person you appoint has to be unrelated to you, or it has to be a trust company of a certain size or certain, you know, like AUM, you know, assets under management. So the trust itself may have some conditions for like what you can and cannot do. But by and large, most people want the beneficiaries to be the trustee appointer. Like the whole point of the trust is that you benefit from it. So if you if things are not working, the trustees not investing your money correctly, they're making the wrong decisions, you know, that's something that you should be able to control. You're the client, essentially. And so, anyways, all of that is to say, yes, that you can rely on a trustee appointer like position. So again, there might be language in there that says the majority of the adult income beneficiaries at that time have to, you know, appoint a new trustee. That's usually for some things like pot trusts where you and your siblings are in together as beneficiaries. So then all of a sudden there's that tension of maybe like, ⁓ some beneficiaries agree, some don't. You have to coordinate with your siblings, you have to go look and hire a new trustee together. You know, that can cause some friction, but usually is the easy way to get around it. There can be a trust protector as well that you can go to. Again, that might be in your trust agreement. And then ultimately, and this is Perhaps the worst thing that can happen, and actually happened to a few of the clients, you know, for that partner who passed away, the story I told earlier, is where there is no mechanism because these mechanisms are in modern trusts. Modern trusts are very concerned, you know, through experience of the trust and estates industry with the replacement and removal and, you know, appointment of trustees. But your older trust agreements might be super simple, have nothing on this. And then all of a sudden you're looking at a court appointment. That is like the ultimate hurdle to overcome. Certain courts, of course, you know, in like the probate states that have easier probate, those tend to be the states where it's actually pretty easy to go to court and ask for a new appointment. But in certain states, it can take months to get the court to like pay attention to your case. All of you guys together have banded together to like file as beneficiaries. Like petitions to essentially ask for, you know, to explain your situation. Like, why do you want the removal of this trustee? Why do you want the appointment of a new one? That paperwork can take years, you know, months to put together. ⁓ the scary thing, too, a little bit with courts, is that they make the appointment based on the best interests of the beneficiaries. And the way that they define beneficiaries might include and usually does include remainder beneficiaries. Minor beneficiaries. So like those would be like, let's say it's a pot trust for siblings and all descendants of those siblings. It could include like your nephew or niece who are not yet adults and who represents them. Is this a guardian? Is this the other parent? Like your in-laws are gonna get involved. That becomes like kind of crazy. speaker-1: So it definitely seems a little messier in in this side of the world. speaker-0: Yes, you so the reason why most modern trusts, the well-drafted ones, pr have this concept of a trustee appointer or trust protector is because so many attorneys and their clients have gotten bitten by, you know, this kind of court appointment system. in New York, for example, this idea of like every beneficiary needs to have representation in the decision is called representation, virtual representation. And you can do vertical or horizontal. You know, horizontal is like you have a sibling who's you know, incapacitated or something, and you have another benefit, you know, sibling step into their shoes to represent their interests too. Vertical is like parent and child. So it gets really crazy in this area. Did you speaker-1: So, like I think advisors sometimes help guide their clients to trustee companies to use. So, did you find attorneys though refer a lot? Or is it kind of one of those areas that you're like, I don't really want to okay? Cause you know, it's like the the world that we live in, like CPAs a lot of times will not refer their clients to anybody because they're like, I don't want to refer to an advisor and a GoPro. And so I could see sometimes, you know, a gray area here of estate planners being like, We draft documents, we make things go well. But if we refer you to trust companies who do bad things, that that liability does somewhat fall on us and we kind of want to stay out of that because I've I've maybe your experience different I haven't met anybody who who loves their trustee. I've had people that are fine with them, but nobody's like, You gotta work with this corporate trustee. They're amazing. speaker-0: ⁓ so we as a as estate planners definitely got taken out to many lunches and presentations by trust companies. So yes, we we did have trust companies come to us. We ended up working with some trustees we liked so much that actually their preferred language, you know, for ⁓ isolating their liability and appointments and the fact that you could maybe do ⁓ like conflicts of interest waivers for like investments of that trust company's like affiliated, you know, ⁓ securities regulated, like investment arm, like a lot of provisions are things that trustee are looking for in the trust themselves. A lot of attorneys actually have forms for their preferred trustees. That's how embedded we are with them. So yes, definitely had favorites. ⁓ speaker-1: Okay, what else have we not talked about as it relates to changing the the trustees? speaker-0: I think at the end of the day, you know, it is always easier for your the while the trust maker, so like your trust or set lore is alive to make those changes. Because usually that's when the trust is the most flexible, the law is the most flexible. You may not even go to the beneficiaries, just go to one person that, you know, is still alive and make the change. After that, it can get a little bit more complicated, but you as an advisor, like this is the practical tip. Is just to ask the question or like look at the trust document and say, is there a mechanism to remove or replace a trustee so that I know that I can continue working with this family, that we will be able to find, you know, like in this circle of trust working for the client and with these assets, we can always find a trustee that we will like. And so I think that's the that's the bottom line. And you know, there are so many tools out there now that can summarize that for you. It's literally just. You know, with AI, like yeah, take your trust agreement, come to wealth.com, ask the question like, what's the mechanism to to appoint and remove a trustee once the person's dead? You know, the the trust or is dead. speaker-1: That makes a lot of sense. I mean, I think that that's the part I was gonna say too is like as an advisor, that's your role. You look at that. The other one is like maybe try to find some good corporate trustees so that way you can help your clients in case there's an issue, but also know like people are not stuck, right? We can help our clients know if you're having a bad experience or whatever, you need to change it and also review, you know, on the revocable side with our clients, are these still the right people at least every few years? So if not, they can make the change before that becomes a problem. speaker-0: Yeah. And the last thing that I'll say too about trustees is sometimes you're not changing the trustee because you don't like them. Sometimes it's actually because of income tax planning. You know, you're trying to get your trust into a better state. So you're firing all the relatives who live in California because they cause you to file fiduciary income taxes here in California. And instead you're like, you know, the beneficiaries have moved out of state. They're in, you know, New Mexico or something. And so why are do we still have California trustees? We just need to move this to Nevada and no longer have California tax. So it's really important to have those trustee removal and appointment powers. Yeah. speaker-1: Okay, perfect way to end. All right, Ann, love doing the episode with you. ⁓ everybody, thanks for listening. Hopefully you learned a couple things. And if you like the episode, please share with another another advisor and tune back in for another episode in a couple weeks.