My favorite definition of love is ‘giving someone the power to destroy us and trusting they won’t use it.’ It’s not a coincidence that the word “trust” also refers to a legal document created to hold and distribute one’s assets, and that the “trustee” is the one who holds all the trust powers.
When considering who should be a successor trustee to your revocable living trust, if you should become incapacitated for example, you are giving someone the power to destroy you financially. Your trustee has the power to invest the trust assets as he or she sees fit, and has the power to make trust distributions.
While the trustee is supposed to follow the terms of the trust, no court of law, no judge, no government regulatory authority monitors your trustee’s actions. If the trustee should make a distribution that is outside of the scope of his or her authority, the trust beneficiary’s recourse is to bring a lawsuit. They can’t stop him so much as they try to recover damages that he caused.
This is why the selection of the successor trustee is so important.
During client conferences when discussing who should serve as trustee, I often have conversations that go something like this: “If both you and your spouse should both be unable or unwilling to serve as your own trustee to your trust, who do you want to serve?”
“I want my oldest son, Ricardo,” client answers.
“Tell me about Ricardo,” I ask.
“Oh he’s not the most responsible one in the family. He’s been through several divorces and even had to declare bankruptcy a couple of years ago. He’s always behind in his alimony and financial support so he’s hauled into court by his ex-wife frequently.”
My eyes open wide, “Really?! This is who you want to entrust with your financial security?”
“Yes,” client says, “if we don’t name Ricardo, he’ll be offended as he is our oldest son. He should be the one named to act for us. Besides, he’ll take direction from Vanessa, our financial planner.”
“What if Ricardo fires Vanessa and decides to invest your trust funds as an online day trader?” I ask.
Clients look at each other with surprise registering on their faces, “He can’t do that, can he?”
“You bet he can!” I answer. “He’s the trustee, so his decisions as to the investments inside of your trust, and which firm he uses to get financial advice is up to him.”
“Well, if he loses all our money could we recover against the internet trading company?”
“No, they didn’t do anything wrong. You would have a legal action against your son for failing to act as a prudent investor, which he has a duty to under the law. My guess is that you probably wouldn’t bring a lawsuit against your own son, and if you did he likely doesn’t have any assets against which you could recover. If he was acting as your trustee, you would likely be incapacitated anyway or you’d be serving as your own trustee. So if Ricardo did all these terrible things you wouldn’t even likely realize what was happening.”
Perhaps now you can see how important the word “trust” is inside of a “revocable living trust” and naming a “trustee.” There are many options to avoid potential disasters. The best option is to select a hyper-responsible individual who is responsive to your legal, tax and financial advisors and would never put their own interests above yours.
Another good idea is to name a bank, trust company or financial firm as a trustee or as a co-trustee. This way, you have built in money-management, as well as an independent authority to act as a check and balance against anything that the individual trustee does. The corporate trustee has a fiduciary duty to follow the trust directions, and has malpractice insurance that you or your beneficiaries may recover against should the corporate trustee act wrongly.
There’s a lot to consider when putting your trust in someone else’s hands. While the ones you love always have the power to destroy you emotionally, when you give them the power to also destroy you financially, you better be sure that they won’t use that power either.
© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.