Avoiding trustee (and family) turmoil

Transferring wealth from one generation to the next can be as complex emotionally as it is financially. According to the 2024 Bank of America Private Bank Study of Wealthy Americans,¹ some 30% of wealthy people cite inheritance as a cause of past, current or future family strain. For many families, trusts are an answer, paving the way for the orderly, equitable and tax-efficient distribution of assets to children and grandchildren. More than 60% of those with $3 million to $5 million in assets and 81% of those with $10 million or more either plan to or have already established trusts.¹

Individual trustees may underestimate their responsibility

Trustees are fiduciaries, legally accountable for making decisions in the best interests of the trust and its beneficiaries. Grantors, out of obligation or a deep, shared sense of trust, may ask a child or close friend to serve as trustee, and that person may accept the position for similar reasons. “It’s easy to overlook the complexities of what’s involved,” says Jennifer Galvagna, head of Trust, Estates and Tax for Bank of America. According to the Study of Wealthy Americans, 44% of wealthy people say they’ve been named trustee or executor for someone else. Of those named trustee/executor, 66% experienced positive feelings about their appointment, while 24% experienced negative feelings and the remaining 10% had neutral feelings.¹

Being a trustee or executor is another zone where strain and stress is common. About a quarter of trustees/executors say they experienced negative feelings about their appointment. Younger people more commonly say they felt overwhelmed, while Gen X and older more frequently say it was a burden. 

Inexperienced trustees may feel overwhelmed by duties such as filing required federal and state tax returns, making appropriate tax elections, sending statuary notices required under state law, and accounting for every dollar that enters or leaves the trust. They may interpret a grantor’s wishes in ways that beneficiaries see as arbitrary or unfair. Tara Morris, National Fiduciary Executive for Bank of America, recalls one trust in which disharmony among beneficiaries and their sibling serving as trustee resulted in multiple lawsuits. “Aſter a series of suits and countersuits, 85% of assets in the trust had gone to lawyers’ fees, and just 15% was leſt for beneficiaries,” Morris says. One way to avoid such dilemmas may be to appoint, as a trustee or co-trustee, a professional who has extensive experience in managing trusts and making distributions. 

One beneficiary may take advantage of others

If a trust has multiple beneficiaries ― oſten called a “pot trust” because there’s one “pot of gold,” so to speak, for several beneficiaries to tap into ― a distribution given to one may feel like it’s coming out of the others’ pockets. These “pot trusts” can be a significant source of family discord and litigation. It can sometimes become a race to the bottom with all beneficiaries jumping in requesting monies as they see the trust being depleted in favor of one or more other beneficiaries. 

Galvagna recalls a situation in which a brother made repeated requests for distributions to fund what his siblings saw as a profligate lifestyle. “The other siblings all received trust statements and could see what was happening,” she says. “They felt their brother was prematurely spending down shared assets.” That conflict leſt the sibling serving as trustee in a no-win situation.

The remedy? Adding an “equalization provision” to the trust document stipulating that when the trust expires and the remaining assets are distributed, the total that each beneficiary has already received will be subtracted from that person’s share. “When a trust is set up in this way, distributions to one beneficiary during the life of the trust have far less impact on other beneficiaries,” Galvagna says. Even aſter a trust is in place, there may be legal procedures available that can assist in mitigating or eliminating the discord among the beneficiaries, such as modification of the trust or a court petition for instructions.

Members of blended families may find their interests at odds

The potential for family conflict only increases when beneficiaries include spouses and children from multiple marriages. “If a trustee is exercising discretion over stepsiblings, or if children from a previous marriage must wait until a stepparent dies to receive their inheritance, things can get very messy,” Galvagna says. While a grantor may expect trustees and beneficiaries in blended families to get along, an approach that deals with potential conflicts head-on — by creating separate trusts, for example, or detailing specific ways that different beneficiaries of the same trust can request and receive distributions — can go a long way toward preventing discord, she adds.

Investment decisions can hurt the trust and shortchange beneficiaries

“Investing a trust account is different from investing your personal funds,” says Colin Korzec, head of Trust and Estate Settlement Services for Bank of America. As fiduciaries, trustees must invest in the best interest of all beneficiaries, and strategies seen as too conservative, too risky or that favor some beneficiaries over others may draw fire. In some cases, trustees may be held personally accountable for losses on investments that don’t meet fiduciary standards. Korzec recalls one charitable remainder trust (CRT) whose trustee invested heavily in municipal bonds to generate tax-free income for family beneficiaries during the life of the trust. Yet because the municipal bonds were unlikely to grow significantly in value, the charity named to receive the remainder of the assets at the expiration of the trust filed suit, claiming its interests had been neglected. As a best practice, Korzec recommends that trustees work with specialists experienced in investing on behalf of trusts.

Lack of communication may lead to misunderstandings

Tensions may also arise when beneficiaries don’t fully understand why the trust was created and what they should (and shouldn’t) expect to receive. “Beneficiaries oſten have the belief that all assets in the trust are their personal assets (which they are not) and that the trust is their piggy bank,” Morris says. Grantors who sit down with family members to explain their intentions with the trust and answer questions may help prevent misunderstandings from occurring aſter they’re gone.

Likewise, trust documents that clearly state the grantor’s intentions can help avoid misinterpretations and disagreements, Morris adds. Grantors also sometimes write a letter to supplement a trust, detailing what they hope to achieve and why. While not legally binding, these “letters of wishes” can help manage beneficiaries’ expectations and guide the trustee’s decisions.

How a corporate trustee can help

A corporate trustee such as Bank of America, serving as sole trustee or as co-trustee alongside a family member or friend, could help minimize friction. “A corporate trustee can be objective,” Galvagna says. Then, if a beneficiary makes what seems like an unreasonable request, another family member doesn’t have to be the one asking the tough questions. “A corporate trustee can be the neutral third party saying ‘no’ when necessary,” Galvagna adds.

Moreover, corporate trustees are trained in the details of managing a trust, which appointed family members may find difficult. “Corporate trustees have the expertise to interpret documents, file the requisite tax returns and manage other tasks that a family member serving as trustee may not be aware of,” Korzec says. And they may offer access to in-house experts who might otherwise have to be hired ad hoc. Bank of America, for example, provides on-staff investment managers with deep experience in investing for trusts. “We also have a host of professionals in-house with specialized knowledge in administering specialty assets that may be placed in trust, such as closely held businesses, real estate, timber, oil and gas and fine art, as well as seasoned tax specialists who’ve seen just about every scenario possible,” Morris says.

Whoever you choose to serve as trustee, and whatever your goals may be, taking time to anticipate potential conflicts and solve for them in advance can help ensure that your loved ones will enjoy the benefits of your generosity with minimal disruption, just as you intended.

Your client team can help you consider ways to protect your legacy while minimizing family turmoil. Having served generations of families, we have the knowledge, resources and experience to administer trusts and estates with sensitivity and professionalism. Bank of America is ranked No. 1 as the largest provider of personal trust services, with $130.4 billion under management.²