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.
It's the corporate trustees who must thoroughly understand the constraints of the trust agreement so they can make sound decisions about distributing assets. That expertise is a big advantage. The alternative solution, which is letting the spouse handle the assets, can lead to trouble if the deceased spouse's children disagree with how the assets are distributed.
To illustrate this point, I'll describe a situation one of my clients faced several years ago.
My client, we'll call her Jane, was a prima ballerina when she met her husband-to-be, we'll call him John. When he saw her perform in the Pacific Northwest Ballet's rendition of The Nutcracker, he was done for. When she met him at the post-performance reception, she also fell head over heels. Unfortunately, this love was a little complicated from the start. John, a successful contractor, was a recent divorcé with two teenage children. The divorce was a difficult one, and the children did not want their parents to split. Needless to say, they did not immediately love their new stepmother, Jane. However, in time their animosity evolved into amicability.
Early in their marriage, John and Jane arranged to have John's premarital assets automatically transferred into an income trust for Jane with John's children named as beneficiaries of the trust at Jane's death, should John die before Jane. And that's exactly what happened, only 20 years earlier than the couple anticipated.
Although John's passing initially brought Jane and the children closer, their relationship quickly soured again when the children learned they would not be inheriting their father's assets immediately. The dynamics became even more awkward when Jane explained to the children that they would not receive the assets until she passed away, and until she did she would be the one to authorize discretionary distributions from the trust to them.
Since Jane was only 47 at the time, she and the children were both upset at the prospect of living with this awkward arrangement for the next 50 years, give or take. Instead of spending half a lifetime filled with not-so-precious moments, Jane decided to delegate her fiduciary responsibility to my firm, Laird Norton Tyee, which offers corporate trustee services. For the last 11 years, we have managed the trust on Jane and John's behalf.
As a corporate trustee, I help clients like Jane understand my firm's job, which is to do the following for all the trusts we manage:
Govern distributions for the specific needs identified in the trust agreement;
Authorize discretionary needs identified by the beneficiaries;
Discreetly investigate the nature of an unusual request for funds;
Tend to the accounting and investing of the assets;
Provide regular statements summarizing account activity;
Answer the financial questions of the beneficiaries; and
Diffuse a heated dispute or two.
Ten years later, Jane happily reports to us that she maintains a warm relationship with John's children and grandchildren.
If you have a client like Jane, a trustee who no longer wants the responsibility, it's important that he or she find the right corporate trustee. Laird Norton Tyee is both an RIA and a trust company, but those advisors who cannot or do not want to offer corporate trustee services must ensure that their client finds the right entity for the task, if only to make their own jobs easier.
Clients looking for a corporate trustee must consider a company's skills. Besides its ability to report to the beneficiaries or keep apprised of estate tax law changes, a trustee must also possess a simple knack for handling people: As part of its fiduciary job description, the corporate trustee should be able to settle heated arguments or tactfully decline an unusual request for funds. It goes without saying that your client should seek a corporate fiduciary that has the ability to act impartially.
To help your client select the right corporate trustee, encourage him or her to consider the firm's experience. Does the firm have internal advisory committees? Can the staff at a company offer continuity and easily transfer knowledge if one of its team members leaves? Are they unbiased and professional? Are they aware of changing laws and best practices?
Encouraging your clients to remove, or at least share, the sometimes awkward responsibilities that come with serving as their trustee is one way you can ease their burden if a second marriage sadly ends before its time.
Barbara Potter is the executive vice president and managing director of fiduciary services at Laird Norton Tyee.