At some point, a friend or loved one may ask you to serve as successor trustee for their trust. Usually people are flattered when this happens, but rarely have they considered what is required of a successor trustee. The successor trustee is responsible for the administration of the trust once the trust maker, or grantor, dies. On occasion the successor trustee will also take over administration of the trust if the grantor becomes incapacitated. Sometimes administration is relatively simple, such as when the beneficiaries are all adults and the trust has no provisions to distribute assets over an extended time. Other times, the successor trustee may administer the trust for a significant amount of time if the beneficiaries are minors or the grantor feels that the beneficiaries are unable to handle their own assets until sometime in the future, if ever.
Whether trust administration is short-term or long-term, there are rules in the common law and Michigan statutes that a successor trustee must follow. When you agree to act as a trustee, you place yourself in a fiduciary situation, and must act with a high degree of care with respect to the trust and its beneficiaries. The Trustee:
- Must follow the instructions of the trust agreement as specified by the trust maker
- Must in good faith, act in the best interests of the beneficiaries of the trust. Good faith means not taking advantage of another, even through technicalities of law
- Must use ordinary care and diligence in the administration of their duties, even if not receiving any compensation for services
- Must invest the funds of the trust properly to preserve the principal and earn a reasonable rate of return
- Must provide accountings to beneficiaries
- Must make distributions to beneficiaries as stated in the trust.
- May not deal with the trust property for Trustee’s own benefit or for any purpose not connected with the trust’s purpose.
- Must not commingle trust property and non-trust property
These are the default provisions under the law, Michigan law allows the grantor to supplement or waive many of the above requirements. For example, the trust provisions may allow the trustee to ignore the normal prudence and diversification requirements for investment of the trust assets, when the grantor wishes to maximize income for the current beneficiary rather than balancing the interests of all the beneficiaries. Additionally, the grantor may also allow the trustee to provide accountings only for current beneficiaries and not contingent beneficiaries unless the court so provides.
Just as the rules for administering the trust can vary, the terms of the trust related to the distribution of the trust assets can take many forms. The trust may provide for great flexibility in distributing assets to beneficiaries by allowing the trustee to make distributions within their total and complete discretion. Alternately, the trust may provide a broad standard, such as health, education, and maintenance of accustomed standard of living. Such a standard would include making distributions to a beneficiary to assist them in starting a business or purchasing a home, but does not allow the trustee to distribute all of the funds outright. Finally, the distribution standard may be very narrow or subject to many restrictions. In these cases, the trustee must carefully monitor the actions of the beneficiaries to ensure that the beneficiary meets all the requirements before making any distributions.
Trust law and the terms of a trust are frequently complex and the trust normally provides that the successor trustee can retain qualified professional help in administering the trust. This means that the trustee can retain accountants, attorneys, or financial professionals to assist in trust administration. The trustee must still take care to monitor the actions of the hired professionals because these professionals do not relieve the trustee of their fiduciary duty, and the beneficiaries can sue the trustee personally and personal assets to the trustee can be reached to compensate beneficiaries for any breach of fiduciary duties.
Unfortunately, trust administration may create the potential for litigation. While the trust maker can include a "no contest provision" in the trust that provides the beneficiary who challenges the document be disinherited, the effectiveness of this type of provision is somewhat mitigated by Michigan law. Beneficiaries may disagree with the terms for distributions the grantor has set; blended families, where there are a number of different beneficiaries with different interest, may also create issues for the trustee; and occasionally a beneficiary may argue that the trust maker had been subject to undue influence or a lack of capacity when the trust provisions were initially prepared or later modified. All of these scenarios make the trustee’s position more difficult because even as they attempt to deal with litigation they must also continue to administer the trust for the benefit of any of the other beneficiaries.
When accepting a trusteeship of a trust is important to remember that it comes with significant responsibilities and may create a larger headache than you ever imagined. While you may feel a personal obligation, should always be aware that a person named as the successor trustee has the option to decline to serve or to resign after initially accepting the position. If you are in the position of being required to make a decision whether or not to accept a trusteeship, it may be appropriate to discuss the situation with qualified counsel to determine if this is the best course of action for you and/or the trust beneficiaries.