After several heart-to-hearts, you decide to put the separate property of both spouses in a trust benefiting one spouse after the first one passes. You also help them decide what will be the ultimate disposition to their respective heirs after the second spouse passes.
Overall, the plan is reasonable. You believe it accomplishes the couple's goal to benefit their heirs but won't leave them vulnerable if there are new marriages in the future. Since the couple anticipates another 20 to 30 years together, they don't ever consider something happening. Until it does.
Let's say the unthinkable occurs: One spouse passes away unexpectedly. As both intended, the estate planning attorney immediately transfers the assets into the trust, and the survivor becomes the trustee. The assets are invested, and the income generated by the trust is set up to be annually distributed to the survivor's bank account. The estate planning attorney then sends a notice of the transfer to the deceased spouse's adult children. What happens if those children are completely surprised and somewhat upset by this new financial arrangement? After all, the couple had not invited the children into their private talks about death and inheritance (as many couples don't).
As the trustee, the surviving spouse must annually report to the children the value of the assets at the beginning and end of each year and create a statement of receipts and disbursements. The survivor also has to let the children know about his or her compensation (if any), and any outside agents hired, including you, the advisor.
Almost immediately, the surviving spouses realize how awkward it can be to report their deceased partner's previously private financial information to the children. It feels as if they are breaking confidence by exposing the private life they shared together. Furthermore, they might not get along with the children, whose scrutiny and questions mean the awkwardness could morph into outright hostility. The surviving spouse and the children will be forever tied to the trust and each other in a marriage of sorts-for better or for worse, until death do they part.
This scenario is all too real for many clients. Some surviving spouses may decide not to report to the children of the deceased spouse, continuing to believe that the information is confidential until the survivor dies, and nobody else's business. However, they would be wrong and maybe even subject to legal action.
Many states have adopted either the Uniform Trust Accounting Act or some version of it. The act states that a trustee is required to inform all interested parties and account to them so they can protect their interests. So legally, the trustee is required to give the beneficiaries annual statements and other information about the activities of the trust.
In this situation, perhaps a better solution is to appoint a corporate trustee. This way the accounting is done by a third party who can also field any questions from the beneficiaries. This leaves your client free to continue the friendly relationships enjoyed before a spouse's untimely death. A corporate trustee could even be appointed as a co-trustee with the surviving spouse if he or she prefers it.
Clients often ask us, what exactly is a corporate trustee? It's a corporation appointed by law to act in a fiduciary capacity on behalf of individuals or other corporations. Put simply, it's a professional trustee whose job is to manage assets in trust for another person, and that's an idea that might appeal to clients.