Irrevocable trusts are often established by a parent or grandparent for the benefit of a child, grandchild or other descendant. Frequently, the irrevocable trust requires that the trustee or at least the co-trustee be a corporate trustee. In most cases, this means that the corporate trustee is a bank, often a bank in the same community in which the trust settlor – or trust creator – resided during their lifetime. If the trust is irrevocable, are the beneficiaries stuck with the named trustee?
Let’s review a typical trust scenario. To keep the example simple, I’ll refer to the trust creators as “Grandma and Grandpa.” Grandma and Grandpa had a significant estate and wanted to retain their estate in trust for the benefit of future generations. To help ensure the continuation of the trust, they wanted professional trust management and desired to name a corporate trustee to serve after they died. Grandma and Grandpa knew the people at the local community bank very well due to a longtime personal or business relationship. Consequently, they named the community bank as their successor trustee.
As years passed, the community bank was purchased by a larger state bank, which was purchased by a large regional bank, which was purchased by a large national or international bank. The large bank is now headquartered in another community (or maybe even another state or country). The individuals that Grandma and Grandpa knew have by now retired or were let go due to the larger bank making an effort to consolidate operations.
Trust services are no longer local, with administration moved to a hub located outside the community. In a continued effort to make trust administration more efficient, administrators in the hub are responsible for greater numbers of trust relationships. As a result, Grandma and Grandpa’s trust beneficiaries now have a corporate trustee who’s less responsive, adheres to rigid investment allocations that seem to consistently deliver mediocre returns and requires more and more information each time a distribution request is made.
The good news is the unresponsive corporate trustee can be removed and replaced with a more responsive corporate trustee. The removal and replacement of an unresponsive corporate trustee can be done in a variety of ways.
1. Language in the trust document may allow for the removal and replacement of the trustee. This is the simplest, most straightforward option to force a change. Such language often identifies a beneficiary or group of beneficiaries who have the ability to remove and replace the trustee. If such language exists, the removal and replacement of a corporate trustee is fairly straightforward. However, if no such language is present in the trust document (this especially applies to older trusts), your client must consider removal and replacement in a different way.
2. Request the current trustee resign in favor of another corporate trustee of the beneficiaries’ choosing. Some corporate trustees may be willing to resign if they feel the relationship with the beneficiaries is somehow broken. However, many corporate trustees have a policy of refusing to resign.
3. Modify the irrevocable trust with the consent of the settlor and all the beneficiaries. The modification could remove and replace the current trustee. However, if the settlor has died – Grandma and Grandpa in our example – this option isn’t available.
4. Petition the court to remove and replace the trustee. A court petition is the “brute force” option to changing trustees. If all the qualified beneficiaries agree, the court can remove and replace a trustee if removal best serves the interests of all of the beneficiaries, removal isn’t inconsistent with a material purpose of the trust and a suitable successor trustee is available.
Even if your client can’t get all the qualified beneficiaries to agree, a court can still remove and replace a trustee if the court is satisfied that the modification isn’t inconsistent with a material purpose of the trust and the interests of any beneficiary who doesn’t consent will be adequately protected. Such an undertaking may be costly and time-consuming and is usually not the most desirable way to effect trustee change.
5. Change trustees using tools provided by the Uniform Trust Code (UTC ), most commonly a non-judicial settlement agreement (NJSA). With an NJSA, an irrevocable trust that in the past was incapable of being updated can now be modified without court action. As a result, an NJSA can be used to remove and replace a corporate trustee with a suitable replacement. If your client can’t remove the trustee under the terms of the trust or convince the trustee to resign, using an NJSA may be the most desirable way to effect a change in trustee.
How It Works
An NJSA is a form document that a practitioner can prepare. It’s valid to the extent it includes terms and conditions that could be properly approved by a court, and it must be signed by all interested persons. The “interested persons” are those whose consent would be required to achieve a binding settlement were a court to approve the settlement.
For the purpose of removing and replacing the corporate trustee of an irrevocable trust, the trustee removal provision under the UTC requires a request by all of the qualified beneficiaries and doesn’t require those beneficiaries to provide any reason for removing and replacing the incumbent corporate trustee.
Consistent with the required findings of a court under the UTC, the NJSA should state that: (1) the removal best serves the interests of the beneficiaries; (2) the change in trustee isn’t inconsistent with a material purpose of the trust; and (3) a suitable successor trustee is available (note a suitable successor to a corporate trustee is usually another corporate trustee). The NJSA should be signed by all the qualified beneficiaries and accepted by the nominated successor trustee. The executed form would then be presented to the incumbent trustee to notify them of their replacement and removal.
Note that all the qualified beneficiaries must sign off on the NJSA as the UTC requires their unanimous request. A qualified beneficiary is anyone who’s currently entitled to receive distributions from the trust and anyone who would be entitled to distributions from the trust if the current beneficiaries receiving distributions were to pass away.
Once the NJSA is received by the current corporate trustee, the process of trustee replacement begins. The UTC requires a trustee who’s has been removed to proceed expeditiously to deliver the trust property to the successor trustee. We often see the current trustee prepare a release and indemnification form and ask the trust beneficiaries to sign that form before transferring the trust assets to the successor trustee. The current trustee could also petition the court and ask for approval of the NJSA and approval of the current trustee’s accountings. Once the release form is signed or court approval is obtained, the current trustee will transfer the trust assets to the new corporate trustee, and service and responsiveness can improve.
Bottom Line: Trust beneficiaries don’t have to be stuck in a relationship with a corporate trustee that isn’t responsive. There exist several options by which a change in trustee can be made to a more responsive trustee, allowing for better outcomes for trust beneficiaries.
Terry Doyle is the senior director of fiduciary sales at Prairie Trust, a division of Waukesha State Bank. He assists clients in achieving their fiduciary and asset management goals and partners with outside advisors in providing “advisor-friendly” trustee services. Contact him at [email protected] .