Estate Plans use both revocable and irrevocable trusts for a myriad of reasons. Regardless of the type of trust created, naming a suitable trustee to administer the trust tops the list of important considerations. After all, the trustee acts as the gatekeeper for the trust, doling out distributions based upon the trust agreement using their own discretion. A beneficiary serving as trustee only works in certain circumstances. Sometimes it’s necessary to name a third party to act as trustee. If a third party serves as trustee, what happens when the beneficiaries, for whose benefit the trustee administers the trust do not trust said trustee? This is the first part of a two-part series exploring the various options that beneficiaries of a trust may use to rid themselves of a trustee.
As with most endeavors, it makes sense to start with the path of least resistance. In this context, that means asking the undesirable trustee to resign. While the conversation may be uncomfortable, the trustee may surprise the beneficiaries and agree to resign. After all, if the beneficiaries are unhappy with the trustee, they likely have let the trustee know that. Such a trustee may resign gladly, especially from a trust with disgruntled beneficiaries. The outgoing trustee may or may not have to prepare an accounting and likely would ask the beneficiaries to sign a waiver absolving the trustee of any wrongdoing now or discovered in the future.
If the trustee refuses to resign, then the beneficiaries need to explore other methods of removal. They should look to the trust agreement itself to see if the grantor gave them the power to remove the trustee. A qualified Estate Planning attorney will consider any options given to the beneficiaries in the trust agreement and evaluate each. The practitioner can guide the beneficiaries through the removal process and ensure that they follow the terms of the trust instrument precisely in exercising the power. Even if the document fails to include a power to remove the trustee, the attorney may help the beneficiaries use other trust provisions such as change of situs, or appointment of a trust protector as a backdoor way to accomplish the ultimate goal of removing the trustee. Again, the outgoing trustee may have to prepare an accounting and would want a waiver of liability.
If the trust contains no provisions allowing the beneficiaries to remove the trustee, then things become more complicated. Beneficiaries have several other options to pursue the removal of a trustee. For beneficiaries in states that follow the Uniform Trust Code (“UTC”), the UTC permits the use of a Non-Judicial Settlement Agreement (“NJSA”) for a matter, if the matter does not violate a material purpose of the trust. Use of the NJSA requires agreement by all interested parties. Determining which parties qualify as interested requires a Trusts and Estates practitioner familiar with the statutory definition to ensure all interested parties agree. The UTC lists several matters that the NJSA may address, although jurisdictions diverge on whether matters not listed may be resolved using the NJSA. Generally, statutes allowing the use of the NJSA do not require court approval, although obtaining court approval would certainly prevent future disagreements on the matter.
If the NJSA will not work, UTC states also allow modification of a noncharitable trust by consent. The comments to the UTC, state statutes, and one state court decision prohibit the removal of a trustee by consent, although the consent may be used to address other areas of contention between the beneficiary and trustee. Interestingly, even if the modification by consent violates a material purpose of the trust, if agreed upon by the grantor and all beneficiaries, it’s allowable. Some states require court approval, others do not. Modification by consent usually requires the consent of the grantor; however, if the grantor does not or cannot agree, modification may occur if such modification is not inconsistent with the material purpose of the trust. Here again, some states require court approval, while others do not.
This article has explored a few options available to beneficiaries desiring to remove a trustee. Well-designed Estate Plans last for years and include provisions that allow the plan to evolve with changes in circumstances. Even if the plan lacks specific provisions regarding the removal of a trustee, beneficiaries have options worth exploring. A qualified Estate Planning attorney could help the beneficiaries avail themselves of certain statutory provisions to oust the undesirable trustee.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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