Contingent Trustee for Profit Sharing Plan

[Stash026]

I have a one-person Profit Sharing Plan that wants to name his daughter as a "contingent trustee", just in case something were to happen to him.  How would we go about that, or is it really more of a beneficiary (or just add her as a second Trustee)?

Thanks everyone!

[Bri]

Shouldn't be too hard to hash out, if you check your trust provisions themselves.  There might be language saying the Employer, when announcing the trustees, can assign specific duties within any group of more than one.  I can also imagine whoever might direct the affairs over the business (after the owner's death) would then have the authority to name successor trustees to the plan sponsored by that business.

[Larry Starr]

On 8/10/2020 at 10:29 AM, Stash026 said:

I have a one-person Profit Sharing Plan that wants to name his daughter as a "contingent trustee", just in case something were to happen to him.  How would we go about that, or is it really more of a beneficiary (or just add her as a second Trustee)?

Thanks everyone!

Assuming you could write language that does the above automatically at his death, it is actually controlled by whoever takes over the contol of the business (the plan sponsor) at this death.  That individual has the authority to appoint trustees and can appoint (or keep) the daughter OR replace her with someone else of their liking. 

We always suggest there be a second trustee just to avoid the problems of what happens if the single trustee dies and then we have to wait for some estate process in order to be able to appoint a new trustee.  If it is a corporation and there are other corporate officers, then there is no problem, but a sole prop dies with its owner and the court would have to get involved to appoint someone to wind up the affairs. A second trustee can continue to provide trustee services without having to wait for the court.

Separately, if the daughter is the natural beneficiary of his bounty, then he should ALSO make sure she is listed as the beneficiary since that cannot be changed after he dies.

So: appoint her as a second trustee now; name her as beneficiary now (especially if the default beneficiary provisions don't already accomplish that).

[david rigby]

The above responses assumed the original Q was concerned with the death of the trustee.  I read the Q more broadly; it may also be prudent to consider disability and/or incapacity.

[Larry Starr]

Just now, david rigby said:

The above responses assumed the original Q was concerned with the death of the trustee.  I read the Q more broadly; it may also be prudent to consider disability and/or incapacity.

 

Which is exactly why we always recommend at least TWO trustees.

[Mike Preston]

There are sometimes valid reasons why a contingent trustee is preferred.  One example: trust has non-qualified assets requiring a bond in excess of $500,000.  In such case the bonding company has been known to request financial statements of each appointed Trustee.  There are no doubt others.  So, while somebody might be willing to accept appointment as Trustee to wrap things up, they might not be willing to sign on as a non-contingent Trustee. The advice we were given is that there is no need for the Trust document to have a provision specifically authorizing a contingent trustee.

Here is what we have used for a long time:

ACTION BY THE BOARD OF

ABC INC. ("Employer")

BY WRITTEN CONSENT

             The undersigned, being the sole Director of the above corporation, and acting pursuant to the provisions of the By-Laws of the corporation, does hereby consent to and approve the following resolution(s):

             WHEREAS, the Employer adopted, and has had in effect the ABC Inc. Profit Sharing Trust (the "Trust") which was initially established in conjunction with the ABC Inc. Profit Sharing Plan; effective the same date; and,

             WHEREAS, [Name of first Trustee] and [Name of second Trustee] have been appointed as Trustees of the Trust effective January 1, 20yy; and

             WHEREAS, The Employer has determined it is in the best interests of the Employer and the Trust's beneficiaries to designate a Contingent Successor Trustee in the event of the incapacity or death of both of the Trustees named above;

             NOW, THEREFORE, BE IT RESOLVED:   That the following individual is hereby named as the Trust's Contingent Successor Trustee:

                                                                                  Linda E. Johndoe 

            RESOLVED, FURTHER:  That the Contingent Successor Trustee shall not serve as Trustee of the Trust unless both [Name of first Trustee] and [Name of second Trustee] are no longer serving as Trustees because of (a) death, (b) physical and/or mental incapacity as certified by two (2) physicians, or (c) a combination of (a) and (b).

             RESOLVED, FURTHER:  That the Contingent Successor Trustee named above shall only serve as Contingent Successor Trustee of the Trust if she accepts, in writing, the appointment as Contingent Successor Trustee, with said acceptance being valid whether it pre-dates the contingencies identified or not.

             IN WITNESS WHEREOF, the undersigned has executed this written consent on the  _____  of February, 20xx.

                                                             __________________________________

                                                            [Director]

=============================================

CONTINGENT SUCCESSOR TRUSTEE ACCEPTANCE

ABC INC. PROFIT SHARING TRUST

 I, Linda E. Johndoe, hereby accept the position of Contingent Successor Trustee of the ABC Inc. Profit Sharing Trust.  Upon notification that both [Name of first existing Trustee] and [Name of second existing Trustee] are no longer serving as Trustees because of (a) death, (b) physical and/or mental incapacity as certified by two (2) physicians, or (c) a combination of (a) and (b).

[Larry Starr]

On 8/12/2020 at 3:59 PM, Mike Preston said:

There are sometimes valid reasons why a contingent trustee is preferred.  One example: trust has non-qualified assets requiring a bond in excess of $500,000.  In such case the bonding company has been known to request financial statements of each appointed Trustee.  There are no doubt others.  So, while somebody might be willing to accept appointment as Trustee to wrap things up, they might not be willing to sign on as a non-contingent Trustee. The advice we were given is that there is no need for the Trust document to have a provision specifically authorizing a contingent trustee.

Here is what we have used for a long time:

ACTION BY THE BOARD OF

ABC INC. ("Employer")

BY WRITTEN CONSENT

             The undersigned, being the sole Director of the above corporation, and acting pursuant to the provisions of the By-Laws of the corporation, does hereby consent to and approve the following resolution(s):

             WHEREAS, the Employer adopted, and has had in effect the ABC Inc. Profit Sharing Trust (the "Trust") which was initially established in conjunction with the ABC Inc. Profit Sharing Plan; effective the same date; and,

             WHEREAS, [Name of first Trustee] and [Name of second Trustee] have been appointed as Trustees of the Trust effective January 1, 20yy; and

             WHEREAS, The Employer has determined it is in the best interests of the Employer and the Trust's beneficiaries to designate a Contingent Successor Trustee in the event of the incapacity or death of both of the Trustees named above;

             NOW, THEREFORE, BE IT RESOLVED:   That the following individual is hereby named as the Trust's Contingent Successor Trustee:

                                                                                  Linda E. Johndoe 

            RESOLVED, FURTHER:  That the Contingent Successor Trustee shall not serve as Trustee of the Trust unless both [Name of first Trustee] and [Name of second Trustee] are no longer serving as Trustees because of (a) death, (b) physical and/or mental incapacity as certified by two (2) physicians, or (c) a combination of (a) and (b).

             RESOLVED, FURTHER:  That the Contingent Successor Trustee named above shall only serve as Contingent Successor Trustee of the Trust if she accepts, in writing, the appointment as Contingent Successor Trustee, with said acceptance being valid whether it pre-dates the contingencies identified or not.

             IN WITNESS WHEREOF, the undersigned has executed this written consent on the  _____  of February, 20xx.

                                                             __________________________________

                                                            [Director]

=============================================

CONTINGENT SUCCESSOR TRUSTEE ACCEPTANCE

ABC INC. PROFIT SHARING TRUST

 I, Linda E. Johndoe, hereby accept the position of Contingent Successor Trustee of the ABC Inc. Profit Sharing Trust.  Upon notification that both [Name of first existing Trustee] and [Name of second existing Trustee] are no longer serving as Trustees because of (a) death, (b) physical and/or mental incapacity as certified by two (2) physicians, or (c) a combination of (a) and (b).

I see no reason why that wouldn't work; of course, the company has the ability to change the trustee at any point, so the day after the contingent becomes the trustee, he/she can be replaced using the same mechanism of a company resolution.

[Mike Preston]

7 hours ago, Larry Starr said:

I see no reason why that wouldn't work; of course, the company has the ability to change the trustee at any point, so the day after the contingent becomes the trustee, he/she can be replaced using the same mechanism of a company resolution.

Agreed that the above is most useful to avoid prolonged inactivity on the part of whoever is taking over the duties of the Company.