Behind the Trustee: Who’s In Charge of Your Legacy?

Learn who really controls your legacy and why choosing the right trustee can make or break your estate plan. In this episode, Peter Klenk explains how trustees work, what responsibilities they carry, and how to select someone who will protect your wishes and your beneficiaries for the long term.

Transcript

Hello. It’s Peter Klenk, Klenk Law, here to talk again about death and taxes. Today’s subject is the trustee—who’s in charge of your legacy.

If you’ve listened to my other podcasts, you know I talk a lot about trusts. They’re great tools. They’ve been around for a long, long time. We got them from the British. They take care of your kids. They address asset protection issues. They make things easier when you die. It’s a tool. It’s not great for everybody in all situations, but in the right situation, it’s a screwdriver for a screwdriver type of job. It’s a wrench for a wrench type of job. It’s a good tool.

One of the things that all trusts have in common is that, to function, they have a trustee—somebody who’s running the trust, the human personification of the trust.

So again, if you’ve listened to my past recordings, you know this, but let’s run over it again. A trust is something that’s created when somebody grants the power to a trustee to hold an asset for a beneficiary. It’s like a triangle. You have the grantor, the person who creates and grants the power. You have the trustee, the person you trust to manage and follow the rules of the trust. And you have the beneficiary, who benefits from the arrangement.

In some situations, like a revocable trust, you’re all three things. You grant the power to yourself to hold assets for a beneficiary—you. That’s a great tool for avoiding probate.

Some trusts, though, are irrevocable. They’re ones that can’t be revoked. They’re set up to hold assets and protect them from creditors and divorce, typically. There are a lot of reasons, but let’s stick with the main ones.

In that situation, the grantor typically is not the beneficiary or the trustee. They grant the power to a trusted person or entity to hold assets for the beneficiary. The classic example from the very beginning was people would put these in their wills to say, “If I die and my son is under eighteen, I grant the power to my brother to hold on to my farm for my son’s benefit until he’s eighteen.” The trustee is the brother, the person who’s there.

But who is this person? What’s their ownership? Does the trustee own something? No. The trustee doesn’t own anything. The trustee is the human personification of the trust. The trust is the owner.

The trustee is the person who’s human. The trust is a piece of paper. It can’t do anything. It just lays out the rules. The trustee is the person who follows the rules, executes the plan, and takes care of the beneficiary. That might even be the beneficiary themselves.

I’m not wrong with setting things up to say, “I want to do this for my son or my daughter. Let them be trustees for themselves, just so that if they get divorced, the assets are safe.” But a lot of times, the trustee is somebody else.

That’s what we’re really talking about here. We’re talking about your kids. If you trust your kid, and you think they’re going to look out for their own best interests and get advice if they need it, then they can be the trustee. But sometimes your kid has a gambling issue. Your kid has been manipulated by their spouse. Some of your kids are still too young. They just haven’t aged enough to be in charge and take on that responsibility.

So at that point, who do you put in charge? Who runs this thing? There are lots of other examples. You might set up a trust for charity. Who runs it? The charity is just benefiting from it. Who runs it? You have to think this through.

So what’s the trustee’s job? A trustee’s job might be very easy. It kind of depends on the trust. You might set up a trust that says, “Things can be invested, and my spouse gets five percent of the gross value every February anniversary.”

Well, that’s not so difficult. They invest the money. You can hire somebody to do that. There’s a tax return, but you can hire a CPA to do that. Every year they do a calculation, send a check, and there you go.

They don’t have to talk to the beneficiary to see how they’re doing. They don’t have to take requests from the beneficiary for money, because they just can’t give it. That’s the rule. It’s just five percent. That’s easy. That’s simple.

That’s not the typical example, though. The typical example is the trustee being given discretion. That means they could give all the money in one day, give none of the money, or give a little bit here and there. They can pay bills.

Now it’s a little more responsibility. They have to invest the money, but again, you can hire somebody to do that. But now they have to talk to the beneficiary and see what they really need.

If the kid shows up and says, “I really need a new car to drive to school,” does that make sense? Should they do that? What’s the overall plan? If the kid needs tuition money, do you pay the tuition? Do you sell some bonds? Do you sell some stocks? How do you do that?

So the discretionary trustee has a lot more responsibility—communicating with the beneficiary, managing the money, and using it appropriately.

You have to think through the people you’re picking. It’s tempting to say, “The oldest kid is going to do it because they’re the oldest.” Don’t pick somebody just because they’re close, a certain age, or a certain person in the family.

You have to think about who’s the right fit, because these trusts are going to go on for a long time, probably someone’s whole lifetime. Some people are built for this type of job, and some people are not. Anyone can handle a job they don’t like in the short run, but in the long run, it’s hard to keep it up.

That leads to potential conflicts. They might put off decisions and the beneficiary gets angry. Or they might not want to stand up to the beneficiary when they should. The beneficiary asks for money for something questionable, and the trustee should say no. But some people aren’t up to the fight anymore. They might say, “I don’t need to hear this,” and just hand over the money. That’s not what you’re looking for either.

You’re looking for somebody who’s going to be reasoned in how they use the money and distribute it.

You have to think through personalities and make sure the person is a good fit. They don’t have to know how to do everything. They don’t have to do the taxes—you can hire an accountant. The trust can pay for that. They don’t have to manage the investments. That’s not their job.

But you do need to be clear on what their job is, and make sure the person you’re picking is a good fit.

For the long haul, you also have to think about backups. People don’t live forever. They might get sick. They might move into a monastery. Things happen. So who’s the backup?

For a lot of people, finding one person who fits the position is a victory. Some people are lucky enough to say, “I’ve got three people—my brother, my sister, then my uncle.” That’s a luxury. Most people have trouble finding one.

So you have to think about it. If the person you pick doesn’t make it through the whole time period, who’s going to step up?

If you don’t have anybody, what I like to do is find someone you trust to do the job, and then trust them to know what characteristics are needed for their replacement.

Typically, these things are set up when you die, so you can’t change them. You’re gone. Who’s alive? The trustee you picked. You can also give them the power to pick their own successor.

For example, the trust is going to exist until my son is thirty. Maybe your sister will be around and capable the whole time. Maybe not. So who steps in?

You might say your sister has the right to pick. She knows what’s going on. She knows what your kid is up to, the economy, the assets. You don’t—you’re dead. So maybe you trust her to name her own backup.

That way you don’t have to scramble with a weak second choice. And if you give her that power, she can change her mind. Things change.

You might pick your sister, and she picks your brother as the backup. Then he goes into rehab, or his life changes, and he’s no longer a good pick. If your sister has the power, she can tear up that decision and pick someone else who’s a better fit.

It might not even be a bad thing. Maybe your kid moves to California. Your brother lives in New Jersey. It might make more sense to have someone physically closer. Maybe it’s a cousin, or even a bank in California.

You have to think through these things.

You don’t have to remember all of this. The idea is that this is something you should talk through with your financial adviser and your trusts and estates person. You want to brainstorm and make sure you’re making the best choice.

And then there’s follow-up. Over time, life changes. Your sister changes. Your kids change. The beneficiaries change. All of this needs to be kept up to date.

What we do is send a reminder every six months saying, “Hey, it’s time to review and take a look at things.” That helps, because this isn’t always at the forefront.

If you realize, “I picked my sister and she was perfect, but now she’s retired, moved to France, and doesn’t see my kids,” it might be time to update things. There’s nothing wrong with that. It’s easy enough to do.

I always try to keep things up to date.

Okay, guys. Just some thoughts and warnings about trusts, estates, and who’s in charge. Please like, subscribe, and follow. That way, as new ideas and podcasts come out, you’ll stay connected.

If you have questions, please give us a ring. Klenk Law—we’re always happy to brainstorm with you about your plan. Take care, and have a great day.

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