Backup Trustee

[Stash026]

Does anyone have any experience naming a "backup" Trustee for a 1-man Profit Sharing Plan?  The plan document only states that the business would name a subsequent Trustee if in the even of death, etc.  He wants to have it stated somewhere who would control the Plan.

Thanks in advance!

[Peter Gulia]

Providing for an orderly succession in fiduciary roles—including not only a trustee but also a plan’s administrator (especially if the trust provides the trustee is directed)—seems wise.

 

Revenue Procedure 2017-41 states: “[T]he following types of amendments will not cause a plan to fail to be identical to a Pre-approved Plan and, thus, will not result in the [adopting] employer losing reliance on the [IRS’s] Opinion Letter: . . . Amendments to the administrative provisions in the plan . . . [if] the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under [Internal Revenue Code] § 401.”

 

Many pages later, the Revenue Procedure states: “Administrative provisions include the allocation of responsibilities among fiduciaries [and] the resignation or replacement of fiduciaries[.]”

[Stash026]

4 minutes ago, Fiduciary Guidance Counsel said:

Providing for an orderly succession in fiduciary roles—including not only a trustee but also a plan’s administrator (especially if the trust provides the trustee is directed)—seems wise.

 

Revenue Procedure 2017-41 states: “[T]he following types of amendments will not cause a plan to fail to be identical to a Pre-approved Plan and, thus, will not result in the [adopting] employer losing reliance on the [IRS’s] Opinion Letter: . . . Amendments to the administrative provisions in the plan . . . [if] the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under [Internal Revenue Code] § 401.”

 

Many pages later, the Revenue Procedure states: “Administrative provisions include the allocation of responsibilities among fiduciaries [and] the resignation or replacement of fiduciaries[.]”

So basically just amend the section "Appointment, Resignation, Removal and Succession of Trustee" and add a section that states who the "Backup Trustee" is?

 

 

[Bird]

I did it once or twice in a volume submitter plan; just kind of winged the language since it wasn't an option.  It wasn't needed so I can't so for sure how it worked out, but I think it is valid.  

[Peter Gulia]

For extra comfort, a business owner might consider asking his or her estate-planning lawyer to read these plan and trust provisions, and might consider referring to them in his or her will.

Doing so might in some circumstances help answer a question about whether a decedent's estate's personal representative has some responsibility.

[Belgarath]

The lawyers may disagree with this approach, but we had a similar request a while back. I didn't amend the document, but just did a resolution and appointment of Successor Trustee, pursuant to Article (whatever) of the plan, with such appointment to become effective only upon the death, resignation, removal, or incapacity of the Trustee, and an acceptance of appointment as Successor Trustee by the Successor Trustee, only in the event of the death, resignation, removal, or incapacity of the Trustee.

Don't frankly know if this is legal, or if it is only "good" for a certain amount of time, etc., etc. - told them to check with their attorney, and never heard back.

[jpod]

A person cannot become a trustee unless he/she/it accepts that appointment, usually as evidenced by a writing.  Also, it is not the question you asked but I believe there is old IRS guidance questioning whether you can have a valid trust where the same individual is the settlor, trustee and sole beneficiary of the trust.  Is that the case here, or is the settlor a separate entity?

[Belgarath]

"A person cannot become a trustee unless he/she/it accepts that appointment, usually as evidenced by a writing."

And just fyi - the document I mentioned above DID require signatures of Employer and the Successor Trustee. (Dated as well, of course.)

[Larry Starr]

3 hours ago, Stash026 said:

So basically just amend the section "Appointment, Resignation, Removal and Succession of Trustee" and add a section that states who the "Backup Trustee" is?

 

 

But remember, whoever actually takes over legal responsibility for running the business has the authority to appoint the trustee (and fire the trustee), so the "backup trustee" is only as secure as the new business operator allows him to be.

[Luke Bailey]

Stash026, I thought about doing this once many years ago for a small plan I was drafting. Seemed like a good idea in theory, but when I thought about the fact that the "backup trustee" provision might not be triggered for 20 years, that you would want the consent in advance of this person/entity, and how much can happen in 20 years, I concluded that I understood why you so rarely see such a provision. Actually, I don't know if I've ever seen one.

[Doc Ument]

It has been my experience that appointments of trustees generally occur pursuant to plan language, not by modifying plan language.  For example, the initial (or continuing) trustee(s) might be mentioned in the preamble, and their signature line(s) presented at the end of the document, but otherwise the plan simply uses the term "trustee" throughout (whoever that is at each point in time). In that case, I fail to see the need for an amendment unless the plan by its terms requires an amendment.  If the employer has the power to appoint trustees without an amendment, the employer has the power to appoint contingent or successor trustees without an amendment.  You generally aren't limited to the types of trustees by the terms of the plan - e.g., could be directed trustees, discretionary trustees, replacement trustees, co-trustees, or successor trustees. In addition, you can put an expiration date on the grant of contingent trusteeship, or, you can condition such designation as being valid under some conditions, or becoming invalid upon other conditions, e.g., the successor trustee is no longer the surviving spouse. The employer is in the driver's seat.

The exception might be where there is a definition of Trustee that names names. Ideally, the definition of trustee does not name names, but simply states the trustee is whoever is designated by the Employer as trustee pursuant to the plan's provisions for appointing, discharging, or otherwise replacing trustees. I wish more plans also stated the need for the trustee to accept in writing.  ("Yo, Tom, did you know you were the trustee of our plan?"  "- -You're kidding me,  yes?")

As pointed out above, watch for a change in who is serving as the successor employer in the event of, for example, a sole proprietor's death.  Typically the spouse would inherit the business, and appoint self as trustee (if not done in advance).  If you want to be sure the original employer's counter-intent prevails, then THAT might require special plan language and a careful review by an attorney (and I agree that such modification of language would generally fall into the category of an amendment that does not destroy reliance). Many plans, incidentally, echo those "permissible amendments" language from the Procedure straight into the text of the plan itself. That makes it delightful when it comes time to explain to the government agent or private auditor why you still have reliance after an amendment or modification, since you have reliance on the preapproved plan language that confers continued reliance for that particular type of amendment or modification.

[Bob the Swimmer]

As a Trust Counsel for 8 years for a Top 100 Bank early in my career, I agree with most of what has been said and Peter Gulia's point is well-made. I think more specificity could be good in certain circumstances (non-institutional trustee, special knowledge and acumen regarding p. and p/s plans and rules,  experience with the former trustee and the business, etc.) but I also agree with Luke that maybe you'd close some avenues to yourself that might change anyway. (I have two LLCs and I have confidence that my spouse, kids and/or estate attorney would handle this in the right way for my 2 DBs, NQDC, and numerous DC plans). Bottom line, it probably depends on the circumstances.