Being asked to serve as a trustee of a trust is a very important job. The decision of whether or not to accept the appointment as trustee should not be taken lightly. The role of a trustee is essential to successful trust administration. As trustee, you are the person responsible for making sure the terms of the trust document are fulfilled. You are also responsible for managing trust property and maintaining accurate records regarding any transactions you make involving the trust. In consideration of these and other duties of a trustee, here are five common mistakes in trust administration that must be avoided.
A trustee is always required to manage the trust property while keeping the best interests of the beneficiaries in mind. A fiduciary duty is one of honesty, impartiality and trust. All actions taken on behalf of the trust and its beneficiaries must be above board. A trustee must avoid engaging in transactions that may be construed as a conflict of interest. Under state law, trustees are also required to invest trust assets prudently and must avoid investing too speculatively. If a trustee fails to satisfy these requirements and the trust assets suffer a loss, the trustee can he held personally liable.
In light of the substantial responsibility of a trustee and the numerous state and federal laws that govern trust administration, we recommend that a trustee seek professional assistance when carrying out the trustee's responsibilities in administering a trust. When a trust becomes irrevocable upon death of the creator of the trust (commonly referred to as the "Trustor" or "Settlor"), the trust becomes a separate taxable entity which subjects the trust to a number of federal (and state if the trust is being administered in a state that has an income tax) tax compliance requirements. A trustee also has responsibilities to provide beneficiaries information about the trust and its administration and to provide annual accountings to the beneficiaries either annually or upon request. Finally, it is highly advisable for a trustee to delegate the responsibility of prudently investing trust assets to a qualified financial professional. This shifts the duty to invest trusts assets prudently from the trustee to the financial advisor and insulates the trustee from any potential personal liability for poor investment choices or investment performance. Investment management is the most highly litigated issue in trust administration.
As a fiduciary, you are required to look beyond your own interests and enforce the terms of the trust document impartially in every decision you make. This may be more difficult than it seems, especially if you have some type of relationship to one of the beneficiaries of the trust, or even if you have emotional ties to the family in general. For example, suppose you are the trustee and have discretion to make distributions of income among your children and other more remote family members who are all beneficiaries of the trust. Such relationships often create the perception, if not a presumption, of a lack of objectivity which could lead to the trustee being removed and replaced with an independent trustee.
As mentioned briefly above, a trustee has a duty to provide beneficiaries a complete and accurate reporting of all transactions involving trust property. This is another very highly litigated area of trust administration. For this reason, it is very important that, as trustee, you are aware of all that your responsibilities encompass and understand the potential risks for liability. State trust accounting laws mandate the information and format in which an accounting must be provided to beneficiaries. Aside from documenting and reporting all the financial transactions of a trust, the trustee's rationale behind each decision he or she makes that relates to trust property should also be documented, especially the trustee's decisions to approve or deny distribution requests from beneficiaries. If a trustee keeps detailed, accurate records of the trust administration, the trustee will be prepared to defend his or her decisions and protect him or her from personal liability if there is ever a dispute.
Trustees are typically entitled to a fee for their services. However, what constitutes a reasonable fee can differ from one state to the next. In some cases, the trustee will not request a fee depending on their relationship to the Trustor and/or the beneficiaries. Unlike corporate trustees, which usually have a set fee schedule, an individual, non-professional trustee will need to negotiate a reasonable fee for his or her services. If a trustee fails to discuss fees up front, when the issue of compensation arises later it may come as a surprise to the beneficiaries who may then challenge the fee. In some situations, a trustee may serve in that role for several years without being paid. Later on, when the time and effort required to fulfill the duties has increased significantly, the trustee may try to seek compensation. If compensation was not discussed at the beginning, the beneficiaries may take issue with paying a fee now, which may result in the need for court intervention.
If you are in the process of establishing your trust and you are considering who to select as trustee, there are many factors you should consider. You should choose someone whom you believe will provide careful management of your trust assets, someone who will exercise the right level of attentiveness when implementing your instructions, and who will demonstrate the ability to place the interests of your beneficiaries above all others. Most importantly, you should select a trustee who will form and maintain a relationship with your beneficiaries and their families. Talk to your estate planning attorney for guidance in choosing the right trustee for you.
If you have questions regarding trust administration, or any other estate planning issues, please contact Anderson, Dorn & Rader, Ltd. for a consultation, either online or by calling us at (775) 823-9455.