When establishing a trust, one of the most important decisions the trust creator will need to make is who will be the trustee. A trustee has the responsibility of administering the trust for the benefit of the beneficiaries in accordance with the written terms of the trust.
The grantor, who establishes the trust, will often name themselves as an initial trustee and a close friend or family member as co-trustee or successor trustee. However, the question arises – does the grantor and whomever they select as a co-trustee or successor trustee really understand all the duties and responsibilities expected of a trustee? Moreover, do they understand the consequences if they fail to perform their duties up to standards required under the law?
Under the law, a trustee has four basic duties: the duty to administer and manage the trust property, the duty of loyalty, the duty of impartiality, and the duty of prudence. Modern trust law has added a fifth duty in many states – the duty to inform.
The Duty to Administer and Manage Trust Property
The trustee has a responsibility to protect the trust property and invest the assets carefully for the beneficiaries. If they don’t personally have the expertise to do so, they have a responsibility to hire and oversee an experienced investment manager. The trustee can be held liable to the beneficiaries for losses if they or the person they hire does not adhere to prudent investment standards required by state law.
The trustee also has significant recordkeeping responsibilities, including the filing of federal and state tax returns and the preparation of a legal accounting to the Court if it is required. They must pay bills, collect debts, and oversee insurance or real estate if these holdings are assets of the trust. While the trustee can delegate these duties to an experienced CPA, bookkeeper or property manager, they can never delegate the potential personal liability if these responsibilities are not done properly.
The Duty of Loyalty
A trustee has a duty of loyalty to act in the best interest of the beneficiaries and to avoid any conflicts of interest. The trustee must follow the trust terms and cannot make gifts, loans, or distributions to themselves or others unless specifically authorized under the trust document. The trustee cannot commingle trust property with their own property or that of others. Trustees who breach the duty of loyalty can not only be removed as trustee, but also found liable for any ensuing losses or damages.
Trustees can charge a fee for their services; however, determining a reasonable fee varies according to state law. Trustees can be sued or sanctioned if the amount is deemed unreasonable. While trust documents or state law typically provides that a trustee can resign if they choose, it may be difficult to do so unless a successor trustee can be found.
The Duty of Impartiality
A trustee has a duty of impartiality to act fairly in regard to all the beneficiaries, including those who do not have a current right to income. This can sometimes be difficult especially if the trustee is also one of the beneficiaries. A trustee, who is also a beneficiary, may possibly make biased decisions. Even if they do act objectively, the other beneficiaries can believe otherwise, and this can lead to family disharmony in the best-case scenario or court room battles in the worst.
The Duty of Prudence
A trustee has a duty to prudently administer the assets and make distribution using reasonable care, skill, and caution. A trustee must distribute the assets to the beneficiaries according to the grantor’s wishes as stated in the trust. This requires assessing both the current and future needs of the beneficiaries as well as considering the current value and anticipated growth of the trust assets.
The Duty to Inform
A trustee must be sensitive to the confidential nature of the grantor’s personal desires, and balance that with the legal duty to report and inform the beneficiaries of their rights. In many states, beneficiaries now have a right to receive a copy of the trust instrument and detailed records of all investments, receipts and disbursements. This means that the trustee must be diligent at recordkeeping in order to maintain good records. Requirements may include tracking all income and expenses, as well as providing verification of income and receipts upon request.
Determining who will be the trustee of your trust can be challenging. Ideally, you want a person who is trustworthy, financially savvy, experienced, and who will respect your final wishes. Few people have family members or friends that exhibit all these qualities. Even if you do have such a family member, you may want to consider whether you want that family member to assume such responsibilities at a time when he or she may be grieving your death. At such times, naming a corporate trustee may be the best option.
Corporate trustees are experienced at managing investments, balancing the interests of beneficiaries, and fulfilling administrative duties. Because the corporate trustee is outside of the family dynamics, they can make objective, unbiased decisions. Moreover, you do not have to worry about age or illness preventing a corporate trustee from completing its duties. You and your beneficiaries are assured continuous management for the entire term of the trust.
Sometimes it is beneficial to have both a corporate trustee as well as friend or family member who serves as a co-trustee. The corporate trustee can provide the investment and administrative experience, while the personal trustee may have intimate knowledge of the needs of the beneficiaries.
Even if you decide not to name a corporate trustee, your trustee can hire one to manage and provide custody over the assets. An investment manager, who serves as corporate fiduciary for other clients, can often provide valuable advice on issues that the trustee encounters while overseeing the trust.
Valerie J. Nevel, Esq.
Senior Financial Advisor & Fiduciary Consultant
Ledyard Financial Advisors
2 Maple Street Hanover, NH 03766
(603) 640-2694
valerie.nevel@ledyard.bank