An unresponsive corporate trustee managing investments

Say an RIA is working with Jane Jones, who is the beneficiary of a trust created 30 years ago by her grandfather and grandmother. Here’s a typical scenario:

• Grandpa and Grandma had a significant estate and wanted it to benefit future generations. To help ensure its continuation, they wanted professional trust management.
• Grandpa and Grandma were well acquainted with and trusted the people at their local community bank due to long-time personal and business-banking relationships. They named the community bank as their successor trustee.
• A few years after Grandpa and Grandma were gone, the community bank was purchased by a regional bank. Then, a few years after that, the regional bank was purchased by a national bank.
• By now, all the people Grandpa and Grandma had known and trusted were no longer employed at the bank. Furthermore, its trust operations were consolidated a thousand miles away.
• For Jane Jones, the beneficiary, the client experience is far different from what Grandpa and Grandma envisioned. She says, “Before the bank was sold, I worked with the same people for 15 years and they would always return my calls. Now, I’m on my third contact in five years and I don’t hear back for days or weeks when I have a question about what I can withdraw from the trust.”

In my experience talking to and working with trust beneficiaries, someone in Jane Jones’ situation is likely to presume, “Oh, well, the trust was set up 30 years ago, and there’s nothing I can do about it now.”

Not if Jane Jones works with an RIA who knows better!

Five paths to naming a successor trustee

Here are five ways to help clients like Jane Jones replace an established but unresponsive corporate trustee:

1. If language in the trust accommodates a change, simply initiate removal and replacement. 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.
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. (This option would not be available in the Jane Jones example, as the settlors – Grandpa and Grandma – have died.)
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 is not inconsistent with a material purpose of the trust and a suitable successor trustee is available. Even if you cannot get all the qualified beneficiaries to agree, a court can still remove and replace a trustee if the court is satisfied that the modification is consistent with a material purpose of the trust and the interests of any beneficiary who does not 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, most commonly utilizing a document called 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. Therefore, an NJSA can be used to remove and replace a corporate trustee with a suitable replacement.

If you cannot 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 does an NJSA work?

An NJSA is a form document that could be prepared by your attorney or the legal department of a corporate trustee. It is 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 persons whose consent would be required in order to achieve a binding settlement were the settlement to be approved by the court.

For the purpose of removing and replacing the corporate trustee of an irrevocable trust, the trustee removal provision under the trust code requires a request by all of the qualified beneficiaries and does not 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 trust code, the NJSA should state that (a) the removal best serves the interests of the beneficiaries; (b) the change in trustee is not inconsistent with a material purpose of the trust; and © a suitable successor trustee is available (a suitable successor to a corporate trustee is usually another corporate trustee).

The NJSA must 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.

All the qualified beneficiaries must sign off on the NJSA; their unanimous request is required under the trust code. A qualified beneficiary is anyone who is 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.

Next steps after delivering an NJSA

Once the NJSA is received by the current corporate trustee, the process of trustee replacement begins.

The trust code requires a trustee who 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.

Advisor-friendly trust administration

Once the trustee change is in progress, a second NJSA can be used to appoint you or your firm as the investment manager of the trust assets.

This can happen in two ways:

• Work with an “advisor-friendly” trust company that is willing to delegate investment responsibility and custody of trust assets to you.

• Establish a “directed trust” arrangement, whereby an NJSA is used to appoint your client as the “directing party” who directs the advisor-friendly trustee to use the RIA’s services to manage trust assets and to allow the RIA to custody the assets.

In either approach, the RIA’s custodian will usually hold the trust’s investment assets, enabling the advisor to manage the assets in a seamless fashion.

Ideally, the result is a win-win for the advisor and client. The advisor benefits by adding additional assets to his or her book of business.

And the client – Jane Jones, in our example – benefits from responsive service from trusted professionals, just as her grandparents did throughout the decades before the community bank was sold and its services consolidated. Jane Jones can now receive personalized service from both the advisor-friendly trust administrator and the RIA she already knows and trusts.

Terry Doyle is a director at Wisconsin-based Prairie Trust, which can administrate trusts in all 50 states with an RIA-friendly approach. Reach him via http://www.prairietrust.com/.

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