Being a Trustee is an important responsibility. If one does not handle the duties of a Trustee appropriately, he can be liable to the beneficiaries of the Trust for the improper actions taken. This article gives general guidelines to Trustees but is not legal or tax advice. Every situation is different, and you should consult with a well-qualified attorney about your individual circumstances.
1. The Trustee should promptly read the Will or the Trust Agreement carefully. The trust document will give the Trustee guidance on how to administer the trust. If you have any questions about the document or your responsibilities as a Trustee, you should contact your attorney. You should also contact your attorney if there is a dispute with or among the beneficiaries, or you are not sure what your obligations are as a Trustee or under the Trust agreement. Remember these key points:
a) The Trustee does not have to get anyone’s permission to take whatever actions the Will or the Trust Agreement directs the Trustee to take.
b) As Trustee, you are a fiduciary. This means that you are required to act honestly and in good faith, carefully manage the assets of the trust and act in the best interests of the beneficiaries of the trust. You cannot put your personal interests ahead of the beneficiaries of the trust.
c) One of the most important jobs of a Trustee is to preserve and protect the assets of the Trust. Make sure all assets that need to be insured are properly insured in the name of the Trust. If the trust requires that the Trustee be bonded, get the appropriate bond.
2. You must follow the Prudent Investor Act in managing trust funds. Under the prudent investor rule, the Trustee is judged not by how well the investments do but rather by whether she follows the standard of conduct set forth in the statute. This standard of conduct requires that the Trustee exercises the same reasonable care, skill and caution in making and implementing investment and management decisions as an investor would for her entire portfolio.
a) Specifically, the Trustee must develop an investment strategy that will enable the Trustee to make appropriate present and future distributions to or for the benefit of the beneficiaries in accordance with risk and return objectives reasonably suited to the entire portfolio, considering:
i) the size of the portfolio;
ii) the estimated duration of the estate or trust;
iii) the liquidity and distributions required under the governing instrument;
iv) economic conditions;
v) tax consequences; and
vi) the expected total return.
b) Generally, a Trustee is required to diversify the portfolio, unless it is in the interest of the beneficiaries that there not be diversification. If the trust funds will be held for any significant period, we strongly recommend that you hire a well-qualified financial planner to assist you in investing the assets.
3. As soon as possible after becoming the Trustee, make a complete inventory of all property of the trust estate.
a) You should get appraisals on any assets, such as real estate, whose value cannot be ascertained without an appraisal.
b) Your opening inventory identifies those assets for which you are responsible as the Trustee of the Trust. You will be required to show the beneficiaries that you have properly administered those assets in the manner directed in the Trust Agreement and in accordance with the Prudent Investor Act.
c) Keep trust assets in separate and identifiable accounts. Never commingle your assets with trust assets.
4. Keep good records.
a) You have an obligation to keep records of all receipts, payments, and transactions pertaining to trust property. You should keep copies of all financial statements related to the trust, such as bank and brokerage account statements.
b) Keeping good records is necessary:
i) so that if anyone questions how you administered the trust, you can show that you acted properly;
ii) tax returns can be properly prepared and filed; and
iii) to keep peace in the family and among the beneficiaries of the Trust.
c) Poor financial records, which do not provide complete and accurate information, cause suspicions to arise, and promote discord among family members and Trust beneficiaries.
d) An accountant or daily money manager can assist you in keeping proper records.
5. Keep the Trust beneficiaries informed about your administration of the Trust.
a) Full and complete communication with all beneficiaries of the Trust is the best way to avoid disputes and misunderstandings. Misunderstandings cause ill will and may result in the filing of lawsuits. You may anticipate that in such a lawsuit the beneficiaries will seek to remove the Trustee and/or to recover damages against the Trustee for mismanagement of the Trust. When the beneficiaries do not know what is going on, they tend to assume the worst.
b) As soon as possible after assuming the office of Trustee send the following to the beneficiaries: 1) a copy of your opening asset inventory; 2) a copy of the Last Will and Testament or the Trust Agreement; and 3) if appropriate, a note outlining how you intend to proceed with the administration of the Trust. You are not legally required to do the foregoing, but openness eliminates doubts and suspicions, while secrecy promotes discord.
c) Eventually the trust will terminate. Before giving the beneficiaries their share of the trust property, you should render a formal or informal accounting. An accounting is a document that gives the details of what was paid into the trust and what was paid out. An informal accounting means that the account is settled by having the beneficiaries sign a receipt and release. A formal accounting means that a court has reviewed and approved the accounting. An informal accounting is less expensive and less complicated than a formal accounting. The reason for an accounting, whether formal or informal, is to protect the trustee from future claims of the beneficiaries that the trust estate was not properly administered.