Have you appointed successor trustees? | Adler Pollock & Sheehan PC

It is generally not enough to appoint an executor to manage your estate after your death or to appoint a trustee to administer a trust. Choosing qualified people to fill these roles takes careful thought and analysis, but that’s only half the battle. For better protection, consider choosing a “successor trustee” who can step in at any time and take over if necessary.

The role of a trustee

A trustee is a person (or entity) authorized to act on your behalf with respect to a range of financial and legal matters. He or she must put your best interests and that of your family first. Thus, a trustee has an ethical and legal obligation to act in good faith. This responsibility extends to the operation of trusts and estates.

A successor The trustee is a person who assumes the role of trustee if the original trustee is no longer able to perform its duties. This may also apply to a trustee who manages assets “transferred” from a trust to an estate.

If you do not make the necessary arrangements, a successor trustee may need to be appointed by a court. So, it is best to name one in your will or trust documents. Typically, this person is a relative, family friend, or trusted financial professional. In some cases, the successor trustee is a financial institution.

Number of characters

The attributes assessed in selecting an initial trustee are basically the same for a successor trustee. Some relevant characteristics are sound judgment and experience, knowledge of family background, investment expertise, sense of impartiality and record keeping skills. Avoid naming anyone with potential conflicts of interest.

Either way, don’t throw this in the lap of someone who isn’t expecting it or who won’t be able to meet your expectations. The work comes with a few strings attached. Depending on the circumstances, a successor trustee may be faced with difficult decisions involving beneficiaries and may have to deal with intra-family disputes.

In addition, a successor trustee should be aware that they may be liable for a breach of their duties, including failure to respond to the actions (or lack of action) of the predecessor trustee. This may require the review of investment and real estate transactions, tax returns, financial statements and retirement plans and other accounts. It is essential that the successor trustee determine whether the assets have been managed prudently.

Preparation of an account summary

One of the main tasks of a trustee is to prepare a summary of assets, income and expenses. The trustee must keep accurate records and make informed decisions. Transparency is essential. In some cases, the account summary may need to be presented to a court, where interested parties may either accept or object to it.

After approval of the account statement, beneficiaries can no longer challenge financial decisions made by the Trustee during the applicable period. Nonetheless, a successor trustee can still be held liable for various transgressions. For example, if a successor subsequently discovers errors, fraud, or “manifest errors” under the supervision of the predecessor, the successor must reopen the account. Otherwise, the successor could be held liable for any losses.

If a successor trustee discovers fault on the part of a predecessor trustee, a claim can be made against the predecessor’s bond. The surety bond is an insurance policy ensuring that the trustee fulfills his duties towards the beneficiaries. A beneficiary or successor trustee can claim damages from the surety company if the losses are attributable to fiduciary misconduct.

Finally, the successor trustee should be aware of the limitation periods for certain transactions. Typically, for errors or faults made by a predecessor, the statute of limitations begins to run when a successor trustee is aware – or should have known – of a potential breach.

Choose wisely

The choice of successor trustees should not be taken lightly. Carefully consider your alternatives and appoint successor trustees who meet the strict standards required by law. Your estate planning advisor can help you make informed choices.

About Yvonne Lozier

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