Being asked to serve as trustee by a friend or family member is a great honor, since it means they consider you to be honest, reliable, and responsible. However, this means that serving as trustee requires these qualities. The job can entail a wide array of complex duties and you’re both ethically and legally required to effectively execute those functions or face significant liability. Given this, agreeing to serve as trustee is a decision that shouldn’t be made lightly and you should thoroughly understand exactly what the role requires before giving your answer.
Of course, a trustee’s responsibility can vary enormously depending on the size of the estate, the type of trust involved, and the trust’s specific terms and instructions. With that being said, there are a few core requirements of every trust that we’ll be highlighting here for you.
Keep in mind that one of the first things to note about serving as trustee is that the job does NOT require you to be an expert in law, finance, taxes, or any other field related to trust administration. In fact, trustees are not just allowed to seek outside assistance from professionals in these fields, they’re highly encouraged to, and funding to pay for such services will be set aside for this in the trust.
Adhere to the trust’s terms
The first step is to carefully review the trust’s terms, as the person who created the trust, or the grantor, would include a trustee’s powers and obligations within it. The trust document outlines all the specific duties you’ll be required to fulfill as well as the appropriate timelines and discretion you’ll have for fulfilling these tasks.
Depending on the size of the estate and the types of assets held by the trust, your responsibilities as trustee can vary greatly. Some trusts are relatively straightforward, with few assets and beneficiaries, so the entire job can be completed within a few weeks or months. Others, especially those containing numerous assets and minor-aged beneficiaries, can take decades to completely fulfill. To ensure you understand exactly what a particular trust’s terms require of you as trustee, consult with us as your Personal Family Lawyer®.
Act in the best interests of the beneficiaries
Trustees have a fiduciary duty to act in the best interest of the named beneficiaries at all times and they must not use the position for personal gain. Moreover, they cannot commingle their own funds and assets with those of the trust, nor may they profit from the position beyond the fees set aside to pay for the trusteeship.
If the trust involves multiple beneficiaries, the trustee must balance any competing interests between the various beneficiaries in an impartial and objective manner for the benefit of them all. In some cases, grantors try to prevent conflicts between beneficiaries by including very specific instructions about how and when assets should be distributed, and if so, you must follow these directions exactly as spelled out.
However, some trusts leave asset distribution decisions up to the trustee’s discretion. If so, when deciding how to make distributions, the trustee must carefully evaluate each beneficiary’s current needs, future needs, other sources of income, as well as the potential impact the distribution might have on the other beneficiaries. Such duties should be taken very seriously, as beneficiaries can take legal action against trustees if they can prove he or she violated their fiduciary duties and/or mismanaged the trust.
Invest trust assets prudently
Many trusts contain interest-bearing securities and other investment vehicles and in such cases the trustee is responsible not only for protecting and managing these assets, they’re also obligated to make them productive—which typically means selling and/or investing assets to generate income. In doing so, the trustee must exercise reasonable care, skill, and caution when investing trust assets, otherwise known as the “prudent investor” rule. The trustee should always consider the specific purposes, terms, distribution requirements, and other aspects of the trust when meeting this standard.
Trustees must invest prudently and diversify investments appropriately to ensure they’re in the best interests of all beneficiaries. Given this, trustees are forbidden from investing trust assets in overly speculative or high-risk stocks and/or other investment vehicles. Unless specifically spelled out in the trust terms, it will be up to the trustee’s discretion to determine the investment strategies that are best suited for the trust’s goals and beneficiaries. This is where you should hire a financial advisor familiar with trusts to help guide you.
Given the unpredictable nature of the economy, it’s important to point out that poor performance of trust investments alone isn’t enough to prove a trustee breached his or her duties to invest prudently. Provided the trustee can show the underlying investment strategies were sound and reasonable, the mere fact that the investments lost money doesn’t make them legally liable.
Next week, we’ll continue with part two in this series explaining the scope of powers and duties that come with serving as trustee.
This article is a service of Levi Alexander, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.