Written by Michael T. Clear, JD, and Erin D. Nicholls, JD
Trustees occupy a pivotal role at the intersection of tax planning, wealth management, and family governance. Entrusted with the power to make distributions, oversee investments, and shape decisions that influence generations, trustees wield considerable influence. With such authority, however, comes the potential for problems: When a trustee becomes ineffective, conflicted, or unresponsive, the orderly administration of the trust suffers, and the potential for a dispute rises—sometimes resulting in protracted, costly litigation.
In these instances, replacing the trustee often becomes the ultimate objective. But the replacement process can vary significantly based on the language of the trust agreement, the statutory remedies available in the state of administration, and the relative cooperation of the parties involved. It is essential to understand the available options, as well as best practices for approaching the removal of a trustee.
RESIGNATION
Before pursuing removal under the instrument or through a court process, beneficiaries should be counseled to speak with the trustee directly and request that they resign, which can offer the following benefits:
- Path of least resistance: A simple resignation is almost always the easiest and least contentious path forward, and many trustees, especially professionals, may prefer to voluntarily step down once it becomes clear that the beneficiaries no longer support their service. Note, though, that some trustees may prefer to be removed under the terms of the trust document or by court order, particularly if they want the protection of a judicial accounting and discharge of liability. Alternatively, in such an instance, the beneficiaries (and additional or successor trustees) may wish to directly release the resigning trustee from liability to avoid the expense and delay of a judicial accounting.
- Negotiation opportunities: Asking for a resignation first can open a dialogue, help avoid an escalation in disagreements, and allow the parties to structure a transition that minimizes disruption.
Practice pointer: Document the request for resignation. If litigation becomes necessary, showing that the beneficiaries attempted a less-adversarial solution can enhance their credibility in court.
REMOVAL PURSUANT TO TRUST TERMS
If the trustee declines a resignation request, the first step before initiating any removal effort through the court should always be a thorough review of the trust instrument itself. Many modern trust documents confer upon someone a trustee removal power, often in a nonfiduciary capacity, unless the trust or state law provides otherwise. If the instrument includes clear removal provisions, following them is usually the most efficient and
effective path to resolution. When reviewing this type of power, consider the following:
- Identity of power holder: It is important to identify who holds the power of removal. Some common options include the beneficiaries themselves or a third party who may hold a unique title such as trust protector. If multiple people are eligible to exercise the power of removal, determine whether the power holders may act independently (sometimes expressed as acting severally) and, if not, whether the power holders must act unanimously or by majority.
- Limitations on power of removal: Many trust documents limit the power to remove a trustee, so it is important to fully understand the scope of the power. Examples of limitations include the following
- Temporal limitations: sometimes the removal power limits the frequency with which it can be exercised (e.g., a trustee can be removed only once every five years).
- Cause required: though less common, the removal power may sometimes require some demonstration of cause to exercise the power.
- Requirements for successor trustees: Before removing a trustee, the trust document should also be reviewed to determine who is designated to serve next. Many trusts name one or more successor trustees who will be eligible to serve upon removal of the current trustee. In other cases, the person or entity holding the removal power is also granted the authority to appoint a successor. Sometimes trust agreements impose qualifications on the successors, such as requiring that they be independent or, in more restrictive cases, that they be a professional trustee (such as a bank, trust company, accountant, or attorney).
Practice pointer: A trust that lacks a clear removal provision can leave beneficiaries mired in costly litigation; overly broad removal powers may undermine the stability of trust administration. The most effective removal clauses . . .
Continue reading the full article for free by downloading the full issue of the WealthCounsel Quarterly—the legal magazine for estate planning and elder law attorneys!
.png)