Financial Planning – Should you serve as a Trustee?

Asked to serve as a Trustee? Think twice, and know what questions to ask

Consider a not uncommon scenario in which a close friend or relative asks you to serve as trustee for a trust he or she is creating or has created. Most people, feeling honored, automatically say “yes.”  Many professional tax and legal advisors recommend, however, that a person asked to serve as a trustee take the proverbial “step back” and consider the potential downside.

Before you officially accept a trusteeship, consider the responsibilities you’re assuming and whether you have the requisite time, energy, expertise, and desire to handle the job.

Trustees that do not do their jobs correctly may be sued and personally held liable. While you may not be concerned about being sued by the person who asked you to serve as trustee, it is likely the trust’s beneficiaries, who perhaps are younger than you (the trustee), who would be the disgruntled parties taking legal action.

A trustee is a fiduciary.  This requires the trustee to act in the best interests of another – in this case, the trust’s beneficiaries.  A trustee owes three primary duties to the beneficiaries: care, loyalty, and impartiality.  Moreover, the trustee must adhere to the express terms of the trust, such as protecting and securing the trust property and ensuring that it is not commingled with other assets. Fiduciary duty is the highest legal standard. Naturally, attorneys representing beneficiaries suing a trustee for negligence rely on this.  Sometimes, especially where a trustee has discretion, or when beneficiaries have competing interests or goals, a trustee is placed in a difficult position.

Case law is replete with examples of trustees being sued, often successfully, by beneficiaries for such matters as self-dealing (where the trustee does not act in the best interests of the beneficiaries, but rather puts his or her own interests first), violating the Prudent Investor Rule (a full discussion of this rule’s requirements is an article unto itself),  failure to maintain proper records and documentation, failure to diversify investments,  failure to monitor the assets of the trust (including traditional investments or even life insurance), failure to account properly, failure to minimize taxes or comply with trust tax law, and failure to engage and/or monitor professional advisors.

Questions and Considerations for a Prospective Trustee

Apexium Financial recommends that a prospective trustee ask the following questions (some of which are also applicable to currently-serving trustees):

  • Who are the beneficiaries of the trust? Will serving as trustee potentially damage your relationship with a beneficiary? For example, if one of the beneficiaries is your friend and you deny his or her request for a distribution, will that be problematic?
  • Does the trustee have discretion regarding distributions to the beneficiaries?  If so, is there guidance regarding such discretionary powers? Without clear guidance, discretion can put the trustee in a tenuous or uncomfortable position.
  • Does the trustee have discretion over trust investments? If so, is there guidance as to the investment goals of the trust?
  • Does the trustee have the authority to delegate to experts?
  • What are the assets of the trust?  For example, real estate, stocks, bonds, life insurance, collectibles, and shares of closely held businesses are common trust investments. Are you knowledgeable about such investments and aware of your duty to monitor the assets?
  • Are there potential conflicting interests between classes of beneficiaries?  For example, a beneficiary receiving current income might want only bonds or other investments favoring income and yield, whereas the remainder beneficiaries, who get the balance of the trust assets at a future date, may desire long-term growth.
  • Can the trustee apportion the trust’s expenses to principal?  This can come in handy, especially if the costs of the trust exceed the income.
  • If the trust has a beneficiary that receives income currently, while remainder beneficiaries get the assets upon the death of the income beneficiary (this is sometimes the case with marital trusts), does the trust have a so-called “unitrust” definition of income? Such a definition might state, for example, that the income beneficiary receives at least 4% of the trust assets each year, even if the income is less.
  • Can the trustee resign easily?
  • Does the trust have self-dealing provisions?  This may be important if the trustee will be rendering professional services, such as tax, legal or investment advice to the trust.
  • Does Errors & Omission (sometimes called trustee liability) coverage exist to “cover” the trustee?  Serving as a trustee, while rewarding, can be a time-consuming and difficult job.  A trustee may receive compensation but is, regardless, exposed to liability.  That is why many wealthy families turn to banks and trust companies, which have full-time trust officers experienced in trust management.  Of course, even if a trust is large enough to warrant a commercial trustee, most people, desire the personal touch of a friend, relative or confidante.  It might be wise, if you decide to be a trustee, to seek the guidance of professionals who are well-versed in handling family and legal conflicts to hopefully ensure that you, the trustee, properly discharge your fiduciary duties under the trust and applicable state law.

The advisors at Apexium Financial assist trustees in understanding the trust and its assets, including providing an analysis of the trust’s investments and periodically reviewing any trust-owned life insurance policies.

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Apexium is not a law firm, does not draft legal documents and does not render legal advice.