Two Trusts Worth Considering an Independent Trustee For

Sep 9

With a Trust, comes a trustee. A trustee is the manager of the trust - the one in charge of managing the stuff and following your instructions. But trusts have varying purposes and varying beneficiaries with varying needs. Because of those varying purposes, you will need to consider whether your trustee (or successor trustee) should be an independent trustee.

What is an Independent Trustee?

An independent trustees is a person and/or entity that is not named as a beneficiary and is not affiliated with any of the beneficiaries. While some trusts require independent trustees, others use independent trustees to as a best practice to avoid a conflict of interest or bias when administering the trust.

To illustrate, I have included two trusts where this situation may arise:

Situation #1: Qualified Terminable Interest Property Trusts (QTIPs)

A QTIP Trust allows the Grantor (the creator of the trust) to provide income for his or her surviving spouse after the Grantor’s death, while enabling the use (or partial use) of the unlimited marital estate tax deduction.

Under a QTIP Trust, commonly used in a blended family situation, the trustee is to provide income for the surviving spouse and may distribute the principal to the surviving spouse in limited circumstances. The remainder of the trust’s assets (i.e., what’s left over) is to go to the deceased spouse’s children – the stepchildren of the surviving spouse in blended family situation.

In such scenario, it is not uncommon for a rift to form between the stepchildren and the surviving spouse who is viewed as spending their “inheritance.” To relax this tension, an independent trustee or third-party may be appointed.

For more information on this particular trust, you can check out our article on QTIP Trusts.

Situation #2: Special Needs Trusts

When a parent has multiple children, but one of them has a severe and permanent disability, the parent may leave large portion of his or her assets to that special needs child by placing it in a trust (sometimes referred to as a supplemental needs trust) for his/her benefit. This may result in the non-disabled children receiving a smaller portion of their parent’s estate (at least initially).

In many special needs trusts, when the disabled child passes away, the surviving children (siblings of the disabled person) usually receive whatever is leftover. Put differently, the non-disabled children are often the remainder beneficiaries of the special needs trust.

For that reason, if one of the non-disabled children is appointed as trustee then he or she may be much more strict in how or when distributions are made to the special needs child. And, unlike the QTIP Trust mentioned above, the trustee typically has much broader discretion – creating the potential for none of the assets to be distributed to the special needs child in order to maximize the benefit for the remaining children. If this situation applies to you and you want to avoid implicit conflict of interest, then you may want to appoint an independent trustee.

For more information on special needs trusts, you may want to check out: ABLE Accounts and Special Needs Trusts - a winning combination.

But what if I can’t find the right independent trustee for my trust?

In practice, most clients still feel the need to appoint one of their children to serve as trustee because their other trusted friends/siblings are too old to serve as trustee. After all, what happens if your trustee / successor trustee predeceases you or become incapacitated shortly after they are appointed?

To resolve this common issue, most clients will appoint one of their children alongside an independent co-trustee. The two trustees would effectively act as check and balance on one another.

If/when the independent trustee ceases to serve for any reason, you could have a mechanism as to how to replace the independent trustee - for example, you could delegate that authority to the existing independent trustee so they could choose their own successor or you could allow the beneficiary or another person (a trust protector) to be able to appoint a successor independent trustee.

While there is no perfect solution to these two scenarios, thinking ahead and getting your thoughts in writing put you in the best position to protect your family’s future.