Trusts have been part of the estate planning conversation for over a thousand years and have become the primary estate planning vehicle in use today. The Trustee is charged with certain duties relative to their role. While being nominated may be an honor, serving as a Trustee carries risk and responsibilities.
Duties of a Trustee and Potential Risks
A Trustee must serve in a Fiduciary capacity having certain duties. The Trustee must act on behalf of the beneficiaries of the Trust, always putting their interests ahead of the Trustee’s own. While seemingly straightforward, many individual Trustees have innocently breached this duty.
Loyalty & Impartiality
Loyalty to the Trust’s beneficiaries is a fundamental duty. A Trustee must avoid placing themselves in a position where they would benefit from an administrative action at the expense of the beneficiaries. This loyalty could be breached innocently by unknowingly influencing a beneficiary.
A trustee must also demonstrate impartiality by administering the Trust in a fair and reasonable manner that is unbiased with respect to the often-competing interests of all beneficiaries.
Balancing current ‘income’ beneficiaries pushing to skew the portfolio toward income-producing investments at the sacrifice of more growth-oriented holdings, which would be advantageous for remainder beneficiaries, can be challenging. A Trustee is tasked with making investment decisions that produce income and increase the value of the corpus of the Trust estate.
Communication & Recordkeeping
All qualified beneficiaries are entitled to sufficient information allowing them to be reasonably informed of the administration of the Trust and all material facts necessary to protect their respective interests. The Trustee must furnish that information confidentially.
Rendering a clear and accurate account at reasonable intervals, at least annually, is critical. Maintenance of clear, complete, and accurate books and records regarding the Trust property and the administration of the Trust is required.
Property & Assets
The Trustee must take control of all property belonging to the Trust and preserve it. With real property, a Trustee is tasked with maintenance, repairs, taxes, insurance, etc. While a Trustee must preserve the property, there is no duty to improve it.
Regarding liquid assets, a trustee has an obligation to invest those assets in a manner that reflects what a ‘Prudent Investor’ would do. The purpose, terms, distribution requirements, and the totality of the circumstances surrounding the Trust must be considered. Tax considerations, diversification of the portfolio, and risk management are all part of the analysis. A Trustee may delegate investment functions to a qualified professional. However, with such a delegation, the Trustee must act prudently in the selection and is required to exercise an appropriate level of oversight after the delegation.
Maintain Integrity & Understand Terms
With certain trusts, the Trustee has additional specific administrative duties required to maintain the integrity of the Trust vehicle involved and to avoid vitiating the purpose of the Trust through mismanagement. For example, administering a Trust for the benefit of a disabled beneficiary may require knowledge of Special Needs Trusts and the interaction of various Social Security programs. Understanding the tax ramifications of a distribution from a Generation Skipping Trust and/or GST ‘exempt’ trust can help avoid mismanagement.
The Trustee must understand the terms of the Trust. Those not well-versed in the meaning of certain legal jargon will struggle to fulfill their duties.
Conflicts of Interest & Discretionary
Authority Recognition and resolving potential conflicts of interest can be difficult and prevalent when the Trustee is also one of the beneficiaries of the Trust. It is vital to fully understand the Trustee’s Fiduciary role and separate it from the Beneficiary role. These ‘two hats’ have very distinctive goals and duties.
Exercising discretionary authority over Trust assets is at the heart of being a fiduciary and can also be one area of potential liability for the Trustee. Where litigation has ensued, the Courts have repeatedly held that the Trustee should follow an established process for evaluating the issues surrounding any discretionary action. A Court will show deference to the Trustee’s decision if it was made per an established process and was properly documented. A Trustee electing to exercise discretionary authority in making a distribution to the ‘squeaky wheel’ without proper analysis or foundation, may result in a difficult defense of that exercise.
Trustee Selection Process
With a basic understanding of the job requirements, the first decision in the Trustee selection process is to choose between two broad categories of potential Trustees: an individual or a professional Corporate Trustee.
Individual Trustee Pros and Cons
- An individual, often a family member, will usually have a good understanding of the family dynamics but must follow the terms of the document, not what they think the Grantor wanted.
- The individual will most often not have the background or knowledge of the job requirements to properly manage the Trust. As a result, while the individual may not charge a fee for their services, they will hire advisors such as attorneys, accountants, and investment professionals to assist them.
- The individual Trustee may have difficulty carrying out the Grantor’s wishes making a discretionary principal distribution to a beneficiary under a defined distribution standard. It can be difficult to say “no” to a beneficiary you later sit across the table from at Thanksgiving. The benefit of a close familial relationship can quickly be spoiled irrevocably, compromising the Grantor’s expectations.
- An individual may be ill-equipped to handle the myriad tasks required to properly administer an irrevocable trust, and thereby avoid potential liability for mismanagement, however innocent the actions were. Should an issue arise that would lead to litigation, the aggrieved beneficiary would be in the awkward position of filing suit against “Good Uncle” who may not have sufficient ‘deep pockets’ to satisfy any judgment entered by the Court.
- Consistent with the human condition, individual Trustees eventually die. Provisions can be made within the Trust document for a successor; however, the transition can be difficult unless clear and concise records have been kept.
Benefits of a Professional Corporate Trustee
- A professional Corporate Trustee brings a wealth of experience and expertise to the role of Trustee and will never die. A Corporate Trustee employs trained professionals well-versed in the specific duties outlined above. These professionals work together as a single Fiduciary entity. A Corporate Trustee has longevity, is unlikely to take sides in family conflicts, will spend the time needed to manage the Trust properly, has investment and money management skills, keeps clear records, and has a deep understanding of the legal requirements of Trust administration.
- As a highly regulated and audited institution, a bank serving as a professional Corporate Trustee will maintain the processes and procedures to ensure that all processes are properly completed and documented. Discretionary decisions are made following the terms of the Trust and as required by law. The Corporate Trustee does not have a ‘Thanksgiving dinner’ problem, so tough decisions are made based on proper analysis. The Trustee will professionally deliver any unwanted news to the beneficiary without any disharmony within the family.
- A professional Corporate Trustee will charge a fee for their services. When compared to the expense an individual would incur hiring appropriate professional advisors in tax, legal, and asset management, the Corporate Fiduciary can provide the comfort of knowing that your family dynamic will not be damaged through a change in roles.
- A professional Corporate Fiduciary is positioned to serve the varied and dynamic needs of the Trust. Anticipating developments and changing circumstances, the Corporate Fiduciary is prepared to take appropriate steps to honor the settlor’s plan and carry out their legacy and maintain family harmony.
If you have any questions or need assistance with selecting your trustee, please do not hesitate to reach out to your relationship manager.