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By Matthew S. Dana, JD, LLM, CPA, CLU, ChFC

One of the most critical issues in an estate plan, and one that oftentimes is discussed the least is whether or not there should be a co-trustee to act with the surviving spouse. If so, who it should be, and who should be the successor trustee when both spouses are deceased. This article will address the need for a co-trustee and address your options for selecting the co-trustee, as well as the choices of selecting a successor trustee when you and your spouse are both deceased.

When I was a young lawyer coming out of law school with a law degree and a CPA designation, I was eager to discuss the Estate and Gift tax implications of an Estate Plan. That was sexy to me. I was eager to show my knowledge, and in most cases, I let “the tax tail wag the dog”. There simply wasn’t enough time that the client was willing to pay to discuss what I considered to be the boiler provisions of a Trust. In those days, most clients believed, and I tended to agree with them, that the surviving spouse should serve alone in settling her husband’s affairs and that the oldest child should serve as the successor trustee. Those days were quite different than today. Estate planning, like any practice and profession, has changed dramatically over the years. Plus, my typical client prototype has also changed dramatically over the years. This has caused me in my later years to take the time to reflect with clients on their options and choices when considering a co-trustee or a successor trustee.

Let’s talk about what has changed. First, let’s talk about the typical client 34 years ago. Clients in my early years were quite modest in net worth. As such, their assets tended to be fairly simple. They had a nice home, a nice car, and a large pension. Usually, they didn’t have much life insurance, but some. Any investable assets they had were more than likely inside of their retirement plans being managed by some financial advisor to their employer. Those assets were typical US Stocks and Bonds. They didn’t have to worry about it much.

Now today, 34 years later, your clients are much more sophisticated. They no longer have large pension plans. Instead, they have large IRAs that they manage themselves. They also tend to have large life insurance policies that may double their net worth when they die. Also, they are more diversified in the sense that they may have real estate holdings, foreign investments, and now we have to discuss “bitcoin”. Today, clients tend to invest more and more in global markets instead of just US holdings and companies. Also, the tax code is much more complicated today. Every time Congress decides to “simplify the code”, they end up creating more complexity.

Back in those early years, the only real choice for a co-trustee or successor trustee was either a family member or a bank or trust company. The duties performed by the bank and trust company were primarily money management. Their main job was to grow the assets. Because the average estate was much smaller, these financial institutions were forced to take clients with a net worth in the $500,000 range or lower. These were the days when people had a banker that didn’t change institutions, and everyone in the family knew and used this banker.

Today, the average net worth of a client has grown dramatically for the upper middle class and the upper class. Now banks and trust companies have raised their minimums to $2 million or more. Their flat fees have gotten larger. The days of the family banker are largely gone. Most of these professionals, like many professionals today, change jobs 3 or 4 times in their career. Plus, look at the mergers and consolidations of the banks and trust companies.

Back then a trustee or co-trustee performed all of the fiduciary duties and functions of an estate. They handled the investing, paid the bills, filed the income tax returns, etc. Today, there has been an “unbundling” of these fiduciary services. Now, it seems as though the banks and trusts companies are most efficient to serve as the money manager only. But, financial planning as a profession for the independent advisors has grown leaps and bounds. In the old days, the most experienced financial minds were with large banks and corporations. Now, there are many good financial options outside of the traditional bank or trust company. The designation of a Certified Financial Planner has grown as a profession, and I am now told that some colleges and universities are offering degrees. We have seen the emergence of the independent financial advisor who is good at money management but does not offer Trustee or Fiduciary Services beyond growing the assets.

We have seen in the last 10 to 15 years tremendous growth in the industry of “Private Fiduciaries”. Now, we have statutes and regulations in Arizona for a Certified Private Fiduciary who is licensed and regulated by the Arizona Supreme Court. These fiduciaries charge hourly rates for services that most banks and trust companies don’t even like to perform and when they do perform, the fees and charges tend to be much higher than the client wants to bear. These fiduciaries have separate hourly rates for such functions like accounting or record keeping, looking more after the physical needs of the clients and helping them with decisions surrounding Medicare and Medicaid. They may actually run errands for their clients. They are not money managers and are, in fact, precluded from performing those services. They help their clients select and supervise the money managers and financial planners. They act more like a consultant for the client.

We also have seen the development of a “Trust Protector” in a document. This may or may not be within a fiduciary capacity. The Trust Protector is given certain powers that a client would not feel comfortable in giving to a bank, trust company or other financial institution. The Trust Protector may act as a watchdog on the trustee. They may settle disputes between beneficiaries and the trustee. And maybe they are given the power to amend the trust long after your death if there has been a significant change in the law or in the family dynamics. Furthermore, the Trust Protector may be given the power to remove and replace a trustee or successor trustee for good cause.

Today, as compared to 30 years ago, trusts are now drafted to last two or three generations beyond the death of the clients. Because these trusts tend to be much larger, and the tax consequences more severe, these “dynasty type trusts” tend to be in existence for much larger periods of time. Think of the changes in family dynamics that we won’t be able to see when the plan is set up. Think of all of the changes impacting families we have seen in the last 20 years. Look at the definition of marriage. Look at the way that children can now be conceived. Look at what is happening in test tubes. Was any of this possible to foresee 20 years ago? What about all the changes we have seen with the banks and trust companies today? We no longer have one banker, we have multiple relationships.

Also, today with many states having enacted better legislation to creditor protection trusts, or states that have no income taxes, or states that provide more secrecy to the trusts, many clients are choosing to set up trusts in other states from where they reside. And, the Trust Protector can be given the power to change the tax situs of a trust if it results in a lower overall tax for the family and the beneficiaries. Most of these functions a client is not willing to vest in the hands of a bank or trust company. And, many of the banks and trust companies do not want the liability to serve in these capacities.

Let’s also look at the parental roles of the husband and the wife today. In many cases, they are reversed. Also, there tends to be at least one parent that is much more lenient than the other. This works well while they are both alive, “good cop and a bad cop”. But, at the death of one spouse, tremendous pressure may be applied by the children as to major decisions that the surviving spouse must make. And, the children have a financial stake in these decisions. So, is it wise to allow them to have a voice in a decision that may conflict with the surviving spouse’s best interest?

Now, let’s look at what happens emotionally to the surviving spouse as the loss of their husband or their wife. In many cases that I have been involved with, it is difficult for the surviving spouse to function, let alone even get out of bed. Now, to make it worse, many, many, many financial and tax elections and allocations must be made by the surviving spouse when they are having a very difficult time coping with the loss of their spouse. Also, in many cases, the net worth of the estate has doubled or tripled as a result of the life insurance. In many cases, because the surviving spouse has a difficult time functioning, my experience is that they don’t make any decisions or any changes. This is not the most efficient result. Wouldn’t it be nice for the surviving spouse to have a co-trustee that they could rely on to help them make these difficult and complex decisions?

So, why not use the kids in this role? Well, for the most obvious reason, they have no expertise or experience dealing with these issues. Second, in many of these decisions, they may have a conflict of interest. For example, what if the surviving spouse remarries, and it becomes a decision of using trust assets to fund the purchase of a larger home? Will the children help mom make the best decision for her or is their decision based upon what’s best for them? And, we all have experienced the sibling rivalry that we have amongst our own children. No matter who you choose to serve there will probably be at least one of the other children who are upset.

What about the traditional corporate trustee, the trust company or bank? Well, as discussed above, they may be the best choice to manage the assets, but may not be the best choice for many of the other fiduciary duties and functions. And, don’t they also have a conflict of interest? They are paid a percentage of the amount they manage. By nature, they don’t like to see the trust funds diminished. Let’s go back to the example that mom wants or needs a larger home. I have seen situations where the trust company turns it down. Did they really think it was a bad idea or were they more concerned with shrinking manageable trust assets? And, in the financial world, are we not seeing a shift from the large brokerage houses to the independent advisors?

So, to me and in my experience the best choice is a private fiduciary. Someone who has sole fiduciary duties and responsibilities to the surviving spouse. Someone who cannot manage the financial affairs of the trust. They can only give input and advice. Someone who is truly independent and has no conflicts of interest. Someone that mom can rely on at the time that she is finding it difficult to function. Someone who can help her with any task as even as menial as coming over and helping organize bills, files, and tax returns. Someone who can hire people needed to manage the house and the yard. Someone who can help with tax elections and allocations. Someone who can serve in the role as “bad cop” when the kids are asking mom to do things that she is uncomfortable with, but cannot say no. It is almost like a mom now has a personal concierge with respect to all aspects of the trust and her well-being.

And what if in the trust document, mom has the right to fire and replace the private fiduciary with another licensed fiduciary or trust company? Wouldn’t this help eliminate conflicts of interest and wouldn’t this also ensure that the private fiduciary is really giving the best advice for mom at the most reasonable rates? Wouldn’t the children feel some comfort knowing mom has someone completely independent that she can rely on to help her thru these very difficult times and decisions?

And, for all of the reasons it makes sense at the death of the first spouse to have a private fiduciary as a co-trustee with the surviving spouse, it also makes sense to have them step in as the successor trustee when mom and dad are both gone. Their fiduciary duties at this point would be to manage the other advisors and divide the estate into shares for the children that are fair and reasonable. Now, a decision that is made to slow down the sale of the family residence in a down market is seen as a good financial decision made by an independent advisor rather than the decision of one of the siblings acting as trustee appearing to make decisions to delay the distributions to other siblings. Now all of the emotion as to the division of the shares, the timing of the distributions, the tax elections made are all made by someone completely independent. Someone that doesn’t have a dog in the hunt.

Once the estate is administered and the shares have been divided, the client could then have each child be their own successor trustee to manage their own separate trust. Now each child is free to act for themselves and their families. Their acts and decisions no longer impact the other children and grandchildren.

In my later years as an estate planner, I now see the importance of these issues and these conflicts. This is now the sexy part of the estate plan. The tax and legal part is tax and legal. We will make sure we get it right and get the appropriate elections and allocations in the documents. We will create flexibility to make some of these decisions in the future, at a time when we have more relevant information. But, as important as it is to have these provisions in the trust, it is equally as important to have someone who is independent to help the surviving spouse at the most difficult time in his or her life make these decisions and elections. An independent co-trustee is the best option to ensure that the estate plan is carried out in the most efficient way possible. And in my mind, the private fiduciary is a very good choice for this role of co-trustee.

When both spouses are deceased, I believe the private fiduciary is the best choice to serve as the successor trustee. Years of experience in seeing many families broken up forever have led to this conclusion. What good does it do to create an estate for the family and then have it only serve to divide the family? Independence and transparency are the keys to a successful trust administration. With all of the “unbundling” of fiduciary services, the best result is to give thought and consideration to the roles of trustee and successor trustee as well as the roles of trust protector and fiduciaries. Let’s get the best people in the best practices for them to contribute to the success of the family in transferring wealth from one generation to the next.

Matt Dana

The Dana name has become the symbol of a quality Estate Plan in Arizona. It has taken over 34 years to develop and continues to strive for excellence in the Estate Planning community. At its core is Estate Planning lawyer Matt Dana. [Learn more about Matt]

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