If you’ve been appointed as a successor trustee, you likely have some questions about your duties, responsibilities, and any financial risks you might face. This article breaks down the role of the successor trustee, including when liability begins and steps you can take to minimize risk.
What Is a Successor Trustee?
A successor trustee is the individual named in a trust document to step in as trustee in the event of the original trustee’s death, incapacitation, or resignation. A successor trustee assumes the role of safeguarding the trust and distributing its assets according to the grantor’s wishes as outlined in the trust document.
While some successor trustees are aware of their appointment beforehand, others may not be, which can lead to complications. The good news is that a successor trustee does not assume any liability until they formally accept the role. This acceptance must generally be done in writing. However, once formal acceptance occurs, liability begins, meaning the successor trustee is now fully responsible for managing the trust and its assets.
These responsibilities include the following:
- Managing Assets: This task includes making investment decisions, managing real estate, or overseeing other assets held in the trust.
- Distributing Assets: The trustee must allocate trust assets to beneficiaries according to the terms outlined in the trust.
- Handling Debts and Taxes: Paying off the deceased’s debts or taxes is crucial, as well as ensuring the timely filing of any necessary tax returns.
- Fulfilling Fiduciary Duties: As trustee, you must act in the best interests of the beneficiaries, maintaining transparency and fairness in decision-making.
- Maintaining Records: Keeping accurate records of all trust activities, transactions, and communications is a vital part of trust administration.
Timing Is Key
The transition from the original trustee to the successor trustee can vary significantly depending on the situation.
In some cases, the transition is planned and smooth, such as when the current trustee intends to step down. This situation allows for the proper handover of documents, a discussion of open issues, and disclosure of any potential challenges.
In contrast, unexpected events, such as the sudden death of a trustee (often the grantor of a revocable trust), can lead to uncertainty. When this happens, the successor trustee must act quickly, often with little preparation or guidance.
Here are some of the potential pitfalls that can result from an unplanned trustee transition:
- Lack of Communication: Failing to keep beneficiaries properly informed about the trust's status can cause frustration and distrust.
- Delays in Distribution: A delayed distribution of assets, especially without a justifiable reason, can lead to disputes with trust beneficiaries.
- Failure to Follow Trust Terms: Distributing assets in a manner that goes against the terms of the trust can result in legal consequences.
- Errors in Recordkeeping: Trustees are often advised to hire professionals (such as accountants, attorneys, and financial advisors) to review records and identify potential errors. If mistakes are found, it’s the trustee’s responsibility to take corrective action.
Steps to Take When Your Trusteeship is Activated
Once it becomes clear that you will assume the role of trustee, here are the steps you should take in the best interest of the trust and yourself as trustee.
- Review the Trust Documents: It is essential for you to understand the terms of the trust and your duties as trustee. Engaging a lawyer at this stage is highly advisable.
- Formally Accept the Role: Sign a legal document accepting your appointment as trustee.
- Notify Beneficiaries and Other Relevant Parties: Inform beneficiaries, financial institutions, and government agencies that you are now the acting trustee.
- Provide Required Documentation: This step may include obtaining a death certificate or medical document that serves as legal proof that the original trustee is deceased or incapacitated.
- Obtain a Certification of Trust: Some states or financial institutions require a certification of trust or similar documentation. Keep in mind that this step might delay your formal activation as trustee.
- Address Administrative Tasks: Complete all necessary administrative tasks to ensure a smooth transition and avoid potential missteps. This step involves timely communications with beneficiaries and financial institutions and paying bills and taxes on time.
- Address Potential Prior Negligence: If the previous trustee was negligent, consult a lawyer to assess any potential legal exposure you might face.
- Consider Liability Waivers: In some cases, requesting a waiver of liability from beneficiaries or relevant parties can provide additional protection.
How Liability Insurance Can Help
Did you know that as a trustee, you can be held personally liable for actions, decisions, and omissions you may make in this role? There is often a gap between knowing you’re a successor trustee and when your formal responsibilities as trustee begin. It’s crucial to use that time to understand your fiduciary duties and potential liabilities, which start once you’ve formally accepted the role.
However, if you know that your appointment is imminent, it might be wise to secure liability insurance before the transition occurs. Purchasing insurance after you’ve assumed the role could leave you vulnerable to claims from the early days of your trusteeship.
Liability insurance for trustees can help protect you against claims of alleged mismanagement, breach of fiduciary duty, or errors in asset distribution. As a trustee, you have a fiduciary responsibility to act in the best interest of the beneficiaries, and insurance can be an essential safeguard should disputes arise.
Being a successor trustee comes with significant responsibilities and potential liabilities. By understanding your role and its risks, you can better plan for a smooth transition.
