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Grantors and beneficiaries often want the ability to remove trustees and appoint replacements.
Since residence, family circumstances, financial condition and tax considerations change periodically, many individuals desire the flexibility to change the oversight and administration of their trusts.
Should you Stay or Should you Go?
Unfortunately, sometimes a lack of satisfactory service on the part of the institution precipitates a desire to replace fiduciaries. In addition, there are now more apparent tax and non-tax reasons than in the past to consider a change in trustees. In recent years, trust instruments have included language that allows for the relatively easy succession of trustees. However, there are several unintended consequences of this development, which represent a significant challenge to the ability of trustees to exercise proper fiduciary powers. It is important for grantors to consider these challenges and balance them against their own goals before including language in the trust document that would foster greater portability.
Why is there Demand?
Traditionally, the removal of trustees and appointment of new ones was quite rare. Unless the administration of the trust was flagrantly mishandled or there was otherwise a breach of fiduciary duty, the trust would stay with the institution named by the grantor.
Replacing a trustee is not as rare today as it once was, and language is being added to new trust documents making it easier to initiate a change. There are several reasons why grantors and beneficiaries increasingly desire trust portability. One of the most important factors is that the relationship between individuals and trust institutions has changed dramatically over the years. Whereas earlier generations felt a certain bond with the institution that served their families for years, such bonds are elusive today. Due to consolidation in the industry through mergers and takeovers, many of the old institutions are no longer the same companies that served earlier generations. Trust professionals are more mobile geographically, as are their clients. A locally based trust company may be undesirable when family members move across the country.
In addition to the evolution of institutions and families, beneficiaries may want to change trustees due to disappointing investment performance. If the trustee is not performing appropriately or if investment performance is unsatisfactory, a change may be warranted. Similarly, sloppy administration may be cause for removal of a trustee. Some institutional trustees may lack the capabilities to manage certain classes of assets, such as alternative investments, real estate or a closely held business. They may have sufficed as trustees when the trust held only bonds or blue-chip equities, but more sophisticated investments coming into the trust may necessitate a change.
Another reason for dissatisfaction is that, in the opinion of the beneficiary, the trustee is unreasonably inflexible with respect to interpreting the terms of the trust document. For example, the trust document may grant discretion to the trustee to distribute principal under certain circumstances, such as seed money for a business venture, but the trustee refuses to exercise that discretion, in light of past lapses in judgment by the beneficiary.
Finally, there may be family conflicts that make existing trustee arrangements undesirable. Replacing a trustee who is related to the beneficiaries with an institutional fiduciary that is impartial can relieve a stressful situation and possibly help to heal strained relationships. Also, an institutional fiduciary with a national or global presence can be advantageous when family members move far from the individual trustee.
Although it is easy for beneficiaries to see the advantages of greater trust portability, the disadvantages may not be so obvious. If portability language in the trust document is too flexible, it could potentially allow the beneficiary to make unreasonable requests of the trustee. For example, a beneficiary could request a distribution of principal for frivolous purposes and then use the implicit threat of removal of the trustee as leverage to have the distribution approved. If the portability language effectively gives the beneficiary control over the trust, it defeats the purpose of appointing a trustee. After all, one of the roles of a fiduciary is to resolve conflict. Why create a scenario where the fiduciary is unable to do so?
Determining What's Needed for a Change
The procedures for changing a trustee can be relatively straightforward, or they can be quite cumbersome, depending on the trust’s governing instrument. Testamentary trusts generally provide little flexibility. If there is no specific provision in the testamentary trust’s governing instrument for replacing the trustees, the ability to do so will be contingent on applicable state law, as well as the specific successor trustees that are named in the document. All of the beneficiaries of the trust may need to grant a waiver, and a court proceeding may be necessary.
For an inter vivos (living) trust, the governing document will usually dictate the procedure for replacing trustees. If there are no such provisions in the trust document, the ease of portability will depend on applicable state law and the specific successor trustees named. A court will usually not be involved in replacing trustees for an inter vivos trust, unless the court has taken over jurisdiction of the trust. The consent of the beneficiaries may be required, but only if all vested and contingent beneficiaries are adults and under no legal disability. For instance, states that have substantive and procedural rules for changing trustees include New York, Illinois, Florida and California.
Making the Decision
Ultimately, grantors will have to decide for themselves whether a provision for the removal of a trustee and the appointment of a new trustee is desirable. For inter vivos trusts, the grantor may retain the power to replace and appoint an independent trustee during his or her lifetime.If and when the grantor is no longer in a position to replace the trustees, the question arises whether to include a removal power and the limitations placed on its exercise. Is such a provision really in the best interests of the beneficiaries? If so, should a third-party "Protector" be given that power?
Alternatively, consideration may be given to requiring a spouse and then a majority of the eligible beneficiaries (e.g. the children) to exercise such a power. Limitations on the removal power may also include requiring that institutions of a certain size serve as a trustee to ensure there is objectivity, as well as the experience and necessary resources to properly administer the trust.
If you have any concerns about trust portability, have your Citi Personal Wealth Management Wealth Advisor reach out to one of our Wealth Planning Specialists, who can work with you and your attorney to arrive at an appropriate course of action.