By Harry S. Margolis
So you've appointed your brother-in-law as the trustee for a trust for your children in case you die before they reach age 25. Or he and his wife have appointed you as trustee on a special needs trust for their daughter with Down's syndrome. Or, finally, your mother has her assets in a revocable trust. In any of these situations, what happens if the trustee becomes incapacitated?
Incapacity can take many forms. It could be progressive dementia, a sudden occurrence, such as a stroke, or a temporary inability to manage due to an injury. Or it may consist of inability or unavailability, rather than actual incapacity. A trustee may become preoccupied with work, move to another part of the country or world, or be busy caring for a family member. In any of these instances, the trust would lose a manager and may not be able to function properly for some time. Fortunately, there are ways to avoid any lapse in management, including the following:
- Name a co-trustee. If the trust has co-trustees, the other trustee or trustees can carry on while one is temporarily or permanently unable to participate. I especially like this solution for my older clients. If they name a child as co-trustee, the child can begin helping them with their finances without taking them over. The child will then be aware of the parent's financial holdings when he has to step in and can do so without having to prove his parent's incapacity. This involvement often helps protect the parent from the types of financial scams perpetrated against seniors.
- Name successor trustees. You can choose who will take over in the event of the initial trustee's incapacity or death. While death is easy to determine and prove, incapacity is less specific. So the trust must also include a process for determining incapacity, perhaps a letter from a doctor (along with a partial release by the trustee so that the doctor can provide the information).
- Give someone the power to replace trustees. One problem with simply saying that a trustee will stop serving upon incapacity is that a perfectly capable trustee may stop fulfilling the function for any number of reasons, whether distractions in her own life or the result of a toxic relationship between the trustee and the beneficiary. Usually the grantor of the trust retains the right to "hire and fire" trustees at will. But when the grantor is incapacitated or has passed away, someone else should be given the power. Some trusts give the person with this power the title of "trust protector." This mechanism in the trust can save the trouble of having to prove that a trustee is incapacitated or is not carrying out his duties as trustee. No proof has to be made -- the trust protector simply changes the trustee.
- Use an institutional trustee. A bank or trust company will be around for the long haul. Some law firms also serve as trustee. While anything can happen to the actual personnel working on the trust account, including (one hopes) retirement, the institution will endure and continue to provide trustee services.
These solutions are not mutually exclusive. Even if your trust has a co-trustee and as series of successor trustees named in the trust document, it's important that the trust give someone or a group of people the power to remove and replace non functioning trustees.