How to Replace a Corporate Trustee (and Make Other Changes)

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Change is inevitable. Smart estate planning involves planning for what-ifs — and that should include how beneficiaries will use and interact with any trusts you might put in place.

When considering the appointment of a corporate trustee, you should also consider the possibility that, in the future, someone may want to get rid of the corporate trustee — or modify the trust in some other way.

The reasons to change a corporate trustee vary, and you should account for them when drafting a trust. (For some thoughts on this, read my article Choosing a Corporate Trustee: The Pros and Cons.)

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For instance, perhaps you have a close relationship today with a team of individuals who work for that corporate trustee, but they leave the company.

While they are the right choice today, there is a possibility this corporate trustee will not be the right choice in the future for your children, grandchildren or beneficiaries.

It is also plausible that the corporation holding the trust charter, which permits it to serve as a corporate trustee, may change in any number of ways that make it a poor choice for the drafted trust and the trust’s beneficiaries. If that’s the case, what are the next steps?

Before addressing what you should proactively consider including in the trust’s provisions, it is important to understand the options available to modify a trust — even irrevocable trusts — in the future.

What options are available to modify a trust?

When signing a trust agreement believed to best serve beneficiaries in the future, you would likely acknowledge that you have no idea what the future holds. Understanding this opens the door to creating flexible trust terms that can accommodate future changes.

Even though some trusts are “irrevocable,” there are ways to change them, and some are easier than others.

The easiest way to change an irrevocable trust is to name someone (for example, a trust protector) when you create the trust who can modify specific trust provisions under certain circumstances and as the need arises.

Of course, this is a powerful tool, so an attorney drafting the trust agreement will want to make sure this power is not unlimited. After all, the creator of the trust wants to feel confident that the trust agreement she or he signs is what will govern descendants’ trusts in the future.

For trust agreements that do not contain provisions for modifying the irrevocable trust agreement, there are still ways to improve trusts if things change or if a trust provision does not work exactly as expected. For example:

Decanting. A trustee can “decant” a trust by transferring trust assets from the old trust into a new trust that more closely fits objectives the trustee and the trust beneficiaries agree were intended by the trust’s creator.

Decanting is sometimes permitted by state law and often included as an option in an irrevocable trust’s provisions by the drafting attorney.

Sometimes, this decanting process is used to accommodate changes in the law that may hamper the efficient administration of the trust.

A non-judicial settlement agreement (NJSA). For states that have adopted the Uniform Trust Code, it may be possible for those with an interest in the trust to enter into an NJSA to modify an irrevocable trust.

There are some limitations to the changes that can be incorporated into an NJSA, but this is another way to introduce some flexibility when there are problems with administering an irrevocable trust.

Re-forming the trust. Possibly the most cumbersome method of modifying an irrevocable trust involves re-forming the trust altogether. This process requires asking a court to modify the trust agreement, and probably only in circumstances where neither decanting nor an NJSA is an option (maybe because the required parties cannot reach an agreement).

Because this method requires going to court, it is likely a more expensive option that will take more time than the previous options.

How does one protect against these possibilities and others in the future? It may not be feasible to include trust provisions that mitigate every possible change, but many attorneys are adept at adding flexibility to trust agreements to avoid time-intensive, and potentially costly, changes down the road.

Trust provisions and corporate trustees

What provisions should be included when drafting a trust that will be managed by a corporate trustee?

While you cannot predict what may change, you can identify the sort of changes that a trust protector may modify in a trust agreement — and you can prevent the trustee from participating in these modifications.

That is, depending on the modification to a trust, a trustee may resist making it. By excluding the trustee from the decision process, you may also eliminate the possibility of the trustees acting in their own best interests.

To avoid the use of a decanting statute or an NJSA in the future, here are some questions that can be addressed in a trust agreement.

Do you want the corporate trustee to be able to agree or disagree with any modifications?

Keep in mind that if the corporate trustee must agree, this will certainly lengthen the trust modification process. Corporate legal and compliance departments will need to review, analyze and approve, and this process rarely happens quickly.

Does the trust agreement authorize payment for trust modification expenses?

If there are expenses associated with trust modifications, make sure that the trust permits paying with trust assets. Otherwise, the trustee may object to using trust assets to pay any bills associated with the changes.

What type of circumstances may be addressed by a trust modification?

This is an incredibly important issue. While you will not be able to predict all possible changes, try to predict some of the biggest, most likely changes and include those.

If relevant provisions of the Internal Revenue Code change, does someone have the ability to change the trust to accommodate them?

Often, a trust agreement contemplates and provides for a trust protector’s ability to modify a trust if the tax code changes and one or more trust provisions specifically rely on the changed tax code provision.

Is there a mechanism to remove/replace a corporate trustee?

Must you replace the trustee with another corporate trustee? Are there requirements in the trust agreement that specify or limit trustees that may be selected and appointed? These are important questions to answer no matter who serves as trustee, but they are especially vital when a corporate trustee is serving because corporate trustees often refuse to resign.

Who may remove a trustee? Is this an easy process? Is the process too easy?

Sometimes when you create a trust, you worry that beneficiaries may remove and replace trustees as a way to control when (and how) they receive distributions. If it is too easy to remove a trustee, this may result in trustees being removed over and over until beneficiaries find one who will do their bidding.

Restricting the frequency that beneficiaries may replace a trustee can serve as a deterrent. The frequency comes down to individual circumstances and could be, for example, permitting a change once every five years.

If there is a conflict between the beneficiaries and the corporate trustee, may the corporate trustee use trust assets to pay to defend its actions?

Are there limitations on the sort of actions the trustee may use trust assets to defend? The ability to use trust assets to pay expenses associated with defending the corporate trustee’s actions is often a requirement before a corporate trustee will agree to serve.

Consider, though, whether you want to limit the sort of actions for which a trustee can use trust assets to defend its actions, inactions or mistakes. Such authority is sometimes limited to actions that are not the result of negligence or bad faith.

Can another trustee be appointed to serve with the corporate trustee?

Appointing a family member as co-trustee can mitigate the impersonal nature of a corporate trustee serving alone. Commonly, there is a provision that permits the trustee to appoint a co-trustee.

Often, trustees need or want help with the trust administration, so why hamper their ability to obtain assistance?

If you are choosing a corporate trustee, you likely have a complex family, complex trust assets or complex circumstances. It is important to understand what options are available to modify a trust in the future in order to best mitigate potential hurdles beneficiaries may face.

And take care to address what provisions should be included when appointing a corporate trustee. Otherwise, the structure could leave trust beneficiaries feeling helpless.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Christopher F. Tate, J.D., is Partner and Wealth Strategist at Fidelis Capital, an advisor-owned wealth management firm dedicated to addressing the complex investment and planning needs of ultra-high-net-worth clients and institutions. With nearly 30 years of experience, Chris specializes in wealth planning, advanced estate planning and cash-flow planning, delivering comprehensive strategies to Fidelis Capital’s UHNW families and institutions. His focus lies in creating tax-efficient wealth transfer solutions spanning generations, income replacement plans for clients undergoing transitions and wealth strategies tailored to the unique and intricate needs of each family member.