Removing and Replacing a Trustee: A Spectrum of Options
Removing and replacing a trustee might seem like no big deal, but it can be serious because of the wide-ranging effects on the trust. Sometimes, for example, the person removing and replacing trustees should be independent of the grantor, i.e. not the grantor herself, her spouse or a person who is related or subordinate to the grantor of the trust. Having a related person remove the trustee can taint a trust that was intended to protect assetsThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More from creditors or taxes. At other times it is fine for the grantor or related party to remove and replace the trustee because asset protectionThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More and tax issues are not in play.
Some may think that a trust should only allow removal of a trustee “for cause.” But, requiring finding cause may invite a drawn-out legal battle over whether there really was a breach of trust by the trustee. It is often better to allow removal in the sole discretion of a third party, such as a so-called trust protector, who is charged with protecting the purposes of the trust.
The Spectrum of Trustee Possibilities
The following is an example of the spectrum of possibilities for trustees being removed and replaced. The options start at the top from the least restrictive options (from the standpoint of the family), and least helpful to maintaining independence and favorable tax qualities, to the most restrictive for the family but the most helpful to maintaining the trust integrity:
Trustees that can be removed from office (and replaced) by family members, some of whom may have a conflict of interest in doing so
Trustees that can be removed from office (and replaced) only by the grantor(s) of the trust while competent
Trustees that can be removed from office (and replaced) by the grantor(s) or by his legal representative, such as a holder of power of attorney for the grantor
Trustees that can be removed from office (and replaced) only by a trust protector appointed by family members, some of whom may have a conflict of interest in appointing the protector
Trustees that can be removed from office without cause (and replaced) only by a trust protector appointed by the grantor(s) acting in good faith
Trustees that can be removed from office (and replaced) with or without cause only by a trust protector acting in good faith
Trustees that can be appointed by persons other than the party who removed the previous trustee
Trustees that can be removed from office only for cause and through legal action, and replaced only with a court-appointed successor.
*The role is limited to making sure that all the assets are gathered, accounted for, sold where necessary, taxes prepared and paid, trust shares divided according to the trust terms or tax law, distributions from the trust final distributions from the trust or creation of new sub trusts, followed by handing off to family members who will act as the permanent trustees, if that is what is called for.
Read Part 1 of Borchers Trust Law’s Spectrum Series here.
Read Part 2 of Borchers Trust Law’s Spectrum Series here.
