3 Alternatives to Naming Family or Friends as Successor Trustees

Surviving spouse. Many married people turn to their spouse to serve as the initial successor trustee. In California, where my firm is based, it is common for spouses to create a joint living trust during their lifetimes with the surviving spouse managing everything after the death of their spouse. While this sounds good in theory, in practice it can be challenging. There are a lot of small but important postdeath administrative details that must be handled. 

If the surviving spouse is older, it may be too much of a burden for them to carry out the trustee duties alone. While some of these duties can be outsourced to attorneys, accountants, and financial advisors, it is ultimately up to the surviving spouse to make sure everything runs smoothly. 

There may also be private business interests that must be managed. Unless the surviving spouse has been actively engaged in the business, they may not have the knowledge or acumen required to properly manage it. 

And when blended families are involved, naming a surviving spouse as trustee may become even more precarious: There can be a lack of trust on the part of children from previous marriages. Sadly, it isn’t uncommon for such disputes to end up in litigation.

Offspring. Naming a child or children to serve as successor trustees can be challenging for many of the same reasons: lack of direct management experience or interest, familial distrust, and even sibling rivalry. Settling an estate is a time-consuming job requiring great attention to detail. If children are busy with careers and families of their own, it can be difficult for them to stay on top of everything.

Friend. It is the rare friend who would welcome the burdens of being a successor trustee—and for good reason: In addition to the financial and legal responsibilities, a trustee inevitably becomes involved in the complex and sometimes difficult family dynamics that occur even in high-functioning families. The death of a senior family member is a time of stress for loved ones and that stress can express itself as frustration or even anger at the slow-moving process of resolving estate and trust issues.

Business partner. Where a closely held business is involved in an estate, one might assume that the natural successor would be a trusted business partner. After all, the decedent was their partner on what was likely their largest single asset. All the potential challenges discussed above apply equally to a business partner; add to those potential conflicts of interest between the partner’s best financial interests and the family’s, and the situation gets even stickier.

Alternatively, selecting a neutral third party as successor trustee relieves family members of the burdens and liability associated with the job of managing a trust. Here are three options for those who wish to explore that route.

Private professional fiduciary. These are licensed professionals with a background in trust and estate administration. Often, they are sole practitioners or very small practices. Some charge an hourly rate and some bill a percentage of the estate’s assets. This type of trustee is a decent option for smaller estates that don’t have complicated assets. When considering a private professional fiduciary, it’s wise to ask about years of experience, bonding/insurance, and expertise they have with the types of assets held in the trust. Also understand the staffing and resources available to such professionals so there are no surprises regarding response times.

Bank trust department. These exist within a bank or other financial institution and contain professionals with backgrounds in trusts and investments. Such departments are regulated by various government and industry oversight bodies and have internal procedures and processes. Bank trust departments will almost always charge based on the value of the estate’s assets. They may also charge additional fees for investment of the assets and even for accounting and distributions to beneficiaries. When weighing this option, make sure to ask for a schedule of fees up front.

It is also important to determine whether a bank trust department has the expertise to handle the trust’s assets. For instance, if real estate assets other than a primary residence are involved, are there real estate professionals on staff to oversee management or will the bank just want to sell the assets as quickly as possible? Ask about the business model and the staff who will be assigned to the account. How many years of experience do they have? How many trusts are assigned to each trust officer? What is the employee turnover rate? Will the trust be compelled to use specific bank products during the administration? If discretionary distributions are made by a committee in the trust department, how often does the committee meet to consider beneficiary requests?

Multifamily office structured as a trust company. There are a handful of such institutions established to serve as the trustee for a founding family’s trusts, and which center their business model around working with families with complex estate plans containing multiple entities including trusts, partnerships, and LLCs. These family office trust companies are a good solution for trusts holding multiple asset classes and several entities.

The family office trust model tends to have lower employee turnover and a more favorable client-to-employee ratio than large bank trust departments. Family offices can shop around for financial and insurance solutions that are appropriate and cost effective rather than being beholden to in-house products. Finally, the culture of a multifamily office tends to be very client-centric with their services often tailored to the client’s day-to-day needs. The caveat is that multifamily offices are typically only available to families with significant balance sheets—usually $10 million or more. 

When weighing all the above options, the geographical location of the trustee should be considered. California, for example, has very onerous fiduciary state income-tax laws that will subject at least a portion of a trust’s income to California tax if even one trustee is a California resident. In situations where no “California-source” income exists and none of the beneficiaries live in California, a trustee in a different state will be the better choice.

But what if, after making the choice, the trustee’s services prove to be substandard? This can be remedied by giving a beneficiary or the majority of beneficiaries the power to remove and replace a trustee. Alternatively, a trust protector may be appointed in the trust document with the power to change the trustee.

An experienced trust attorney will have experience with all three models of third-party trustees and be able to offer invaluable advice and direction.

Thomas J. Frank Jr. is executive vice president and Northern California regional manager at Whittier Trust Co.’s San Francisco office. He has more than 30 years of experience in comprehensive family office services, including investment consulting, banking, trust and fiduciary, family education, and financial administration for high-net-worth clients.