Appointing a trustee who is, well, trustworthy is crucial to ensuring a trust operates as intended. As such, you may invest a large amount of time and mental energy in selecting the right person for the job.
But what happens if your carefully chosen trustee fails to carry out your wishes?
Your beneficiaries may want to remove or replace your trustee in this circumstance, but they won’t be able to without facing a lengthy and expensive court battle—that is, unless you grant them the power to remove a trustee.
A trustee’s role and responsibilities
A trustee holds the legal responsibility to administer a trust on behalf of its beneficiaries. This person’s authority may be broad or extremely limited, depending on the terms of the trust.
There are certain fiduciary duties to the beneficiaries of the trust that a trustee must uphold. For example, a trustee is expected to treat all beneficiaries impartially and fairly. They must also manage the funds in the trust prudently.
It sounds simple, but when beneficiaries have competing interests, a trustee’s role can quickly become complicated. When it comes to making investment decisions, the trustee must find a way to balance the beneficiaries’ variable needs.
In some ways, choosing an executor and naming a trustee are somewhat similar. Both roles require financial acumen, dedication to the beneficiaries and the deceased person, and great attention to detail.
Since investment expertise is important to the role, many people opt to choose a professional trustee rather than a friend or family member. Those who don’t should encourage their trustee that they can—and should—consult with financial experts as appropriate.
“Cause” for removing a trustee
If you don’t grant your beneficiaries the option to replace or remove a trustee, they would have to petition a court to remove the trustee. For a petition to be considered, the beneficiaries must be able to prove “cause” for the removal or replacement.
While the definition of “cause” isn’t the same in every state, there are some common grounds for removal, such as:
- Bankruptcy or insolvency that impacts the trustee’s ability to manage the trust
- Conflict of interest between the trustee and at least one beneficiary
- Fraud, misconduct, or other mismanagement of funds
- Legal incapacity
- Poor health
While cause isn’t always difficult to prove, going to court can be expensive and time-consuming. Plus, many courts are hesitant to remove a trustee who’s been chosen by the trust’s creator.
With this in mind, it may be wise to include a provision in the trust document that empowers beneficiaries to remove or replace a trustee without cause if they’re dissatisfied with their management of the trust.
As an alternative, you might choose to list specific circumstances in the trust document under which your beneficiaries may remove a trustee.
Alternative options to limit beneficiaries’ power
If you’re concerned about your beneficiaries having too much power over your trust, you might choose not to have them elect a removed trustee’s successor. Instead, you could opt to list a succession of potential trustees within the trust document.
If one trustee is removed, the next person on the list automatically becomes the trustee, instead of the beneficiaries choosing the next one.
Appointing a “trust protector” may also be a viable option. A trust protector is a person you grant power to make certain decisions regarding the management of your trust, including whether to remove or replace trustees.
Questions? Smolin can help.
For additional information on the role a trustee plays—and what your beneficiaries can do in the event that your person of choice fails to perform the job—contact a knowledgeable Smolin accountant.
