From AIG to Washington Mutual, 2008 was a rocky year for many of America's best-known financial companies. Smaller firms felt the pinch too: Twenty-two banks failed in the U.S. last year, as of this writing, including non-household names such as Community Bank in Loganville, Ga. The FDIC had 117 more banks on its "problem" list, so even more institutions could go under.

The sad tidings have taken a toll on planners. Client meetings have been dominated by discussions of dwindling portfolios. What's worse, many clients' assets are held at troubled firms, leading planners to have to answer questions about the safety of those devalued assets.

At the beginning of 2009, some sunlight is filtering through the clouds. Now, at least, there's some good news that planners can call to tell their clients: The federal estate-tax exemption has just jumped from $2 million to $3.5 million, so this is an excellent time to suggest a meeting to review estate plans (see "Is Bigger Better?").

"When advisors are discussing estate plans with clients, they can also review the financial institutions included in those plans," says Martin Finn of the law firm Lavelle & Finn in Latham, N.Y. "If there are doubts about one or more of those firms, it may be possible to make changes."

If a trust has the proper language, the grantor, trust protector or beneficiary may be able to change institutional trustees. If a client's 2009 estate plan calls for establishing a trust, an advisor can recommend the inclusion of such a provision. According to Gloria Neuwirth, partner in the law firm Davidson, Dawson & Clark in New York, a trustee replacement provision generally should state that the new trustee should be independent, that is, not related to the person establishing the trust by blood, marriage, adoption or through an employer-employee relationship. "This is a technical term," she says, "as defined in the Internal Revenue Code."

Trustee Trouble

Your client may well have named a financial firm as a trustee. "In our practice we don't like to use financial institutions as primary trustees because they tend to be extremely conservative when it comes to exercising discretion," says Albert Ellentuck, counsel to the law firm King & Nordlinger in Arlington, Va. "We may use them as backup trustee or when the grantor [the trust creator] cannot come up with a primary trustee."

For example, a client might have created a revocable trust, naming himself or herself as trustee, and transferred assets into the trust. Should the grantor for some reason become incompetent, the successor trustee would assume responsibility for the trust's assets. An institution might be the successor trustee or co-trustee.

If the client remains the trustee until death, however, a revocable trust will then become irrevocable and the successor trustee will take over. Again, the new trustee might be an institution; that's especially likely if the trust is meant to remain in effect for decades or to span generations.

This is where the health, management or ownership of an institution comes into play. Say you don't like what's happened. Can you change the trust?

A revocable trust can be amended, and a properly drafted irrevocable trust will also allow changes of the trustee while the grantor is still alive and competent. Finn considers this flexibility a best practice. "When we draft a trust, we usually include a provision giving the grantor the authority to change trustees, especially if we are naming an institutional trustee," he says.

If your clients' trusts were created several years ago, a review may help them realize that changes are needed. "Most clients won't even remember what financial institution they chose," Ellentuck says. "I think clients should check their documents to see if they are concerned about the institution and if there are proper alternatives built in. If not, they should call their estate planning attorney."

Suppose, for example, John Smith had created a revocable trust, naming his local bank as a successor co-trustee after his incapacity or death. Smith had a longtime relationship with the bank and knew the manager personally. If that bank has since been merged and the trust department has moved to another state, John might want to change successor co-trustees.

Beyond the Grave

However, a grantor's ability to change trustees won't help after he dies and his revocable trust becomes irrevocable. At that point, Ellentuck says, a trust protector or, in some cases, the beneficiaries may be allowed to select a replacement trustee. A trust protector can be one individual or a committee consisting of several people, including relatives and non-relatives.