Selecting a Trustee is not a decision that should be taken lightly. However, many people merely select a family friend or their eldest child without a second thought as to whether they are truly qualified and willing to handle the duties. In the context of Revocable Living Trusts, since the Grantor is usually the initial Trustee, the decisions that need to be made are usually in regards to who shall be the Successor Trustee(s). Here are a few factors should be considered when selecting a Trustee or Successor Trustee:
What qualities does the Trustee possess? For people with adult children, selecting the eldest child to act as Trustee is the default. It makes sense to them for the mere fact that the child is the oldest and that the child likely helped care for their younger siblings growing up. However, having seniority is not a prerequisite to being a competent Trustee. For example, the youngest child may be better suited to be the Trustee because of his temperament or perhaps he has an investment or financial background. Instead of merely looking at age of the potential Trustee, think about whether she has the qualities and skills that would allow her to succeed as Trustee. Some of these qualities include being detail-oriented, trustworthy, fair-minded, responsible and having good communication skills,
Will the Trustee have time? An overlooked factor that thwarts Trustees and sometimes gets them into trouble is not having enough free time to administer the Trust. Examine the life situations your potential Trustees are currently in. Is your selection juggling a demanding job and a busy family life? People often equate being Trustee to having a second job. It's not far from the truth. Of course, circumstances change, but it would be wise to consider the Trustee in their current situation and not extrapolate what their lives may be in the future. You can always amend your selections at a later date if a person is no longer suitable to act as Trustee.
Where is the Trustee located? With technological advancements, having a Trustee who is in close proximity to trust assets is not as big of an administrative hurdle as it was in the past, but it certainly makes the Trust easier to administer if your Trustee is nearby. And given our state's isolation, this is especially true for a Trust whose situs is in Hawaii. Consideration should be given to the cost an out-of-state Trustee will incur when employing agents to carry out the administration. This cost will likely be paid for out of trust assets, which will leave less for the beneficiaries. If some of your prospective trustees live on the mainland while others reside in Hawaii, thought should be given to how willing a mainland Trustee may be to administer a Trust located in Hawaii.
How complex and large are the assets in the Trust? If your Trust contains significant assets or is perhaps a legacy Trust that is designed to last multiple generations, you may want to forgo selecting an individual Trustee and opt for a corporate Trustee. While a corporate Trustee's fees will likely exceed those of what an individual may request, a corporate Trustee does have the institutional support and expertise to manage more complex Trusts. However, for Trusts that have assets of less than $100,000, employing a corporate Trustee may not be worthwhile monetarily since a corporate Trustee sometimes charge a minimum fee, which could be a sizable percentage of the trust assets.
How are the relationships between the beneficiaries? If you are aware of conflicts between your beneficiaries, naming one of them as Trustee may not be the wisest move. Other beneficiaries may resent the beneficiary you chose to act as Trustee and those feelings may balloon into costly legal battles. Sometimes beneficiaries will engage in petty bickering, but these distractions will be enough to make cause unnecessary stress for the Trustee, which may lead to additional problems. Therefore, if tension exists between your beneficiaries, whether it is underlying or overt, selecting an impartial, corporate trustee may help reduce the potential for litigation among the beneficiaries. If you're thinking about using a family friend as Trustee, consider the unenviable position he may be placed in when having to act as a mediator or referee to your beneficiaries.
Just ask. Finally, ask your prospective Trustees if they want the responsibility of being Trustee. Explain that administering the Trust and communicating with the beneficiaries will take time away from their own lives and pursuits. Ask if they'd be willing to make that temporary sacrifice for you. Making upfront disclosures to Trustees of their responsibilities will help mentally prepare them for the eventuality of being a Trustee.
HB 2623 amends Hawaii Revised Statutes Section 509-2 and extends Tenancy by the Entirety Creditor Protection to Trusts in Hawaii
Among the many bills that were considered and passed in the 2012 Hawaii legislative session was a law that would allow spouses and reciprocal beneficiaries (RBs) to place real property in a trust AND be extended the creditor protection afforded by holding property as tenants by the entirety. Thus, spouses and RBs may preserve their creditor protection while taking advantage of the benefits of placing their real property into a trust.
For those unfamiliar with the concept of tenancy by the entirety, it is a form of concurrent property ownership. The other types are tenants in common and joint tenancy. Tenancy by the entirety is a form of ownership that is available only to spouses or reciprocal beneficiaries. The main benefit of holding property as tenants by the entirety is that a creditor of an individual spouse or RB cannot attach and sell the real property interest of the debtor spouse. However, this creditor protection is not available against a couple's joint creditors.
In the 2012 legislative session, HB 2623 added a few new subsections to Hawaii Revised Statutes Section 509-2. Prior to this bill passing and being signed into law, two people who held real property as tenants by the entirety and wanted to create separate trusts would need to break the tenancy by the entirety ownership and convey their interests into their respective trusts as tenants in common, thereby losing the creditor protection. However, HB 2623 now states that real property held by spouses or RBs in equal shares as tenants in common in their respective trusts shall be treated as if the real property (or its proceeds) are held as tenants by the entirety.
These new additions to Hawaii Revised Statutes Section 509-2 states that this creditor protection shall continue even after first of the couple passes away. This is also true if a court in any proper jurisdiction holds a trust to be invalid while the couple is still alive. Of course, if spouses divorce or reciprocal beneficiaries terminate their legal relationship, the tenancy by the entirety is severed and the real property will be held as tenants in common.
To gain the creditor protection for real property held in trust, certain requirements must be met and specific language needs to be inserted into the conveyance deed. In general, holding real property in tenancy by the entirety is preferable, but of course, it depends on the situation and as well as future considerations. Consult with an attorney to explore whether this extension of tenancy by the entirety for Hawaii trusts is right for you.
So you have a new baby on the way or perhaps already have several little ones underfoot. There are a multitude of things that you're likely worrying about as new or recent parents and estate planning is probably not one of them. However, discussing and making a few key decisions on the outset can help protect your family and children's interests in the years to come.
Nominating a guardian and conservator via a Will: A guardian and conservator are necessary for minor children because they cannot legally make decisions for themselves or own property in their individual name. In the event a minor child becomes orphaned and no guardian and conservator has been nominated by the deceased parents, then it is possible that relatives (e.g. the child's maternal and paternal grandparents or uncles and aunties) may engage in a lengthy legal battle to decide who will be legally responsible for the child and control the child's inheritance. This can be avoided by having the parents nominate a guardian and conservator for their minor children through a Will. Hawaii law also allows parents to make a nomination via a "signed writing", but it is safer to nominate a guardian and conservator through a properly drafted and signed Will. However, if the minor child is at least 14 years old, the minor may nominate her own guardian and conservator. The court will strongly consider the minor child's preference and determine whether the child's nomination is the best interests of the child.
Choosing who will be a guardian and conservator for a child is a difficult decisions and can sometimes hurt the feelings of those who weren't selected. However, this isn't a valid reason to not take action. Even if new parents are not completely certain about their choices for a guardian and conservator, it is better to have those selections initially memorialized in a Will. Providing some guidance on the parents' preferences is better than having none at all, which is something that could lead to a Hawaii court making inappropriate appointments. Of course, circumstances change and parents may reconsider their selections, but they can always revise their Wills at a later date to reflect those changes.
Creating a Trust: At the very minimum, new parents should have Wills drafted that nominate a guardian and conservator for their minor children as discussed above. However, creating and funding a Trust will allow parents to exert greater control over how and when property will be distributed to their children. For example, the trust terms may state that the trustee should partial distributions to the child when he reaches 25 years of age, 30 years of age and 35 years of age. This is in contrast to the legal requirement that a custodian under the Hawaii Uniform Transfers to Minors Act or a court-appointed conservator relinquish control of the property when the child reaches either 18 or 21 years of age. And since a child may lack the maturity or money management skills to handle property at 18 or 21, a trust can leave the property in the hands of a capable trustee to be managed and also extend the distribution timeline.
Trusts become an even more important tool if the minor children have special needs or disabilities. A Trust can be used to ensure that a child will continue to receive public assistance and medical benefits and also provide proper management of any property or assets that they may receive.
Life insurance: Life insurance is a powerful estate planning tool that should not be overlooked by new parents. At the most basic level, life insurance proceeds can be used as income replacement in the event a working parent passes away. Stay-at-home parents should also purchase life insurance to help cover childcare costs if they pass away. The insurance proceeds can help sustain a family as everyone recovers and plans for the future. However, in the best case scenario where there isn't a need for a death payout, life insurance can also be a great investment vehicle for a family since whole and universal life insurance policies can build cash value and earn interest over time. Parents of all ages and income levels should strongly consider purchasing life insurance policies that are within their individual budget and a good fit for their current family situations. Furthermore, naming a Trust as a beneficiary of a life insurance policy will allow the proceeds to be managed and distributed to your spouse and children according to your wishes.
In an earlier article we reviewed various duties that are imposed upon a trustee. In this post, we will discuss some of the possible grounds that may merit the removal of a trustee in Hawaii. Generally speaking, there are no grounds for the automatic removal of a trustee and a court has wide latitude when considering the removal of a trustee. The court will consider each situation on a case-by-case basis. However, there are instances when a trustee's acts are so egregious that they provide a court with ample reason to remove the trustee. The following are some of the grounds that may lead to a trustee's removal:
Failure to obey a court order. A court may order a trustee to do some administrative task (e.g. pay taxes or make distributions to a beneficiary or complete an accounting). If a trustee willfully ignores a direct order from the court regarding some aspect of a trust's administration, a strong argument could be made for the removal of that trustee.
Failure to follow the terms of the trust instrument. If the trustee disregards the terms of the trust and manages the trust as he sees fit, the court will likely consider removing the trustee since the trust is not being administered as the settlor had intended. For example, if the trustee distributes trust property that is not in accordance with the trust's terms or fails to make investments as directed or makes prohibited investments, removal may be warranted even if the size of the trust estate has grown under the trustee's management. In this instance, the removal is not based upon the performance of the trust assets under the trustee's direction, but rather the fact that the trustee was not administering the trust as the settlor had envisioned.
Failure or refusal to act. As mentioned in the earlier post, a trustee may simply, for whatever reason, fail to act. A trustee's failure to act may result in the wasting or dissipation of trust assets, which the trustee could be held personally liable. Even if no harm is done to the trust estate from the trustee's inaction, the trustee may still be removed if it can be shown that he ignored repeated requests by the beneficiaries for the trustee to act and administer the trust.
Co-mingling of trust property with personal assets. If a trustee co-mingles the trust's assets with her own, even if it was a honest mistake, the court may find cause to remove the trustee. The separation of trust assets from personal assets is a fundamental duty since it affects the security of the trust property.
Failure to account. If a trustee fails to provide an accounting to a trust beneficiary due to inadvertence with no malicious intent, the court would likely not remove a trustee for that reason alone. However, if the trustee's actions (or inaction) were meant to hide the true state of affairs with the trust, then the court may have reason to remove the trustee.
Trustee takes trust property for own use. If a trustee appropriates trust property for her own use and was not authorized to do so per the trust's terms, then the trustee may be removed by the court. Even if the use of the property was an honest mistake, the court has an obligation to ensure the preservation of trust property. Restitution will likely be ordered by the court, but this remedy would only be to ensure the trust is made whole and would not be enough to counter the removal.
Hostility between trustee and beneficiary. While we've mainly talked about what may constitute grounds for removing a trustee in Hawaii, the fact that a beneficiary may not get along with a trustee is NOT a valid basis for removal. Disagreements or incompatibility between a trustee and beneficiary are frequently cited as reasons for removal, but a court will usually not take action if the trustee is administering the trust properly. However, if the hostility has escalated to a point where it affects the trust's administration or it has led the trustee to engage in vindictive acts, then a court may be persuaded to remove the trustee.
When someone first learns that he or she has been named as a trustee of a trust, they may feel a sense of pride or flattery. However, being a trustee is often times an unenviable position to be in. Yes, a trustee is afforded power and control of trust assets, but "With great power comes great responsibility." This adage is particularly applicable to trustees since their authority is tempered by a myriad of responsibilities and duties. A trustee is not an authoritarian or dictator (even though some act like they are), but instead are more akin to an administrator. The trustee must never forget that, at the end of the day, the trust beneficiaries wield the true power since they are the ones the trustee must answer to.
The trustee-beneficiary relationship begins with the simple fact that a trustee is a fiduciary. The law imposes legal duties on trustees, some of which will be discussed below. In Hawaii, Hawaii Revised Statutes Section 560:7 outlines the statutory duties and liabilities of a trustee.
According to Hawaii Revised Statutes Section 560:7-302, when dealing with trust assets, a trustee must act with the care of a prudent person. However, if a trustee has special skills or expertise or made representations that he or she possesses special skills or expertise, the trustee is obligated to use those skills. Consequently, a trustee with special skills may also be held to a higher standard if something goes awry. For example, if a trustee is a financial advisor, but makes highly questionable investments, he or she may be held personally liable for any losses resulting from those failed investments. Without question though, all trustees must exercise reasonable care and skill. When examining a trustee's actions, the court will usually consider the trustee's decision in the context of the facts and circumstances at the time the decision was made.
Hawaii Revised Statutes Section 560:7-303 states that a trustee has a continuing duty to keep beneficiaries informed of the trust's administration and to provide the beneficiaries with, at the very minimum, an annual accounting. A trustee also has a duty to provide beneficiaries with a copy of the terms of the trust that pertain to and affect a beneficiary's interest in the trust and information regarding the trust's assets.
In addition to these statutory duties, trustees must also be cognizant of these well-recognized duties and responsibilities:
Duty to Administer Trust Expeditiously: What often times gets a trustee into trouble is a failure to act. Or, if the trustee does act, he or she only does so intermittently. The trustee's inaction may not have any malicious intent or motive, but could simply be a byproduct of dealing with their own busy lives. However, being preoccupied is not an acceptable reason for a trustee to sit on their duties and responsibilities or not put forth a reasonable effort to administer the trust. The trustee must actively participate in the trust's administration because beneficiaries (especially if they're discontent) may not be so understanding about delays.
Duty of Loyalty: Generally speaking, a trustee cannot have their interests conflict with those of the trust (e.g. engaging in business that competes with the trust). A trustee is also prohibited from transacting business with the trust where the trustee may benefit directly or indirectly. A common violation occurs when a trustee borrows or embezzles trust funds. This mainly happens when there is a lack of oversight or supervision over the trustee.
Duty to Keep Trust Property Separate: A trustee should never, under any circumstances, commingle trust property with his or her personal property or with any other property not owned by the trust. This has a practical application because accounting for the trust property is simplified when trust investments and cash are kept in separate trust accounts.
Duty to Make Trust Property Productive: A trustee has a duty to invest trust property to produce income for the beneficiaries. For example, if the trust owns real property that has the potential to be rented out, the trustee has a duty to find tenants that would pay fair market value to live there. A trustee should not leave the property vacant merely because it would be less of an administrative burden.
Duty to Avoid Conflict of Interest: A trustee can neither use trust property for their own personal gain nor be part of an transaction that the trustee has an interest adverse to a beneficiary.
If a trustee is derelict in adhering to any of the aforementioned duties (and others that are not covered in this post), they leave themselves vulnerable to dealing with malcontent beneficiaries and, possibly, a lawsuit filed by the aforementioned malcontent beneficiaries. If you are a trustee in Hawaii and feel overwhelmed or unsure about what to do, contact a Hawaii estate planning attorney who can advise you on fulfilling your trustee duties and responsibilities.
Samuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters.
DISCLAIMER: All content and information is provided by The Law Office of Samuel K.L. Suen, LLLC and is for general informational and discussion purposes only and does not constitute legal advice. Transmission of this information is not intended to create, and receipt does not constitute, a formation of an attorney-client relationship. The information presented at this site is believed to be accurate when made, but may not be complete, is not updated, reviewed or revised on a regular basis. No representations or warranties whatsoever, express or implied, are given as to the accuracy, applicability or validity of the information contained herein. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances. You should not act or rely on this information without consulting with a licensed attorney.
To ensure compliance with requirements imposed by the IRS, please note that any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained herein.
Copyright © 2018 Law Office of Samuel K.L. Suen, A Limited Liability Law Company. All Rights Reserved.