You Are A Trustee… Now What?

Being a trustee is a big responsibility. A trustee who does not fulfill his responsibilities could end up being sued or, in extreme cases, criminally liable for his actions.

There are four aspects to a trust. The first is the person who creates the trust. This is usually the person whose property and/or assets are placed into the trust. This person might be called the settlor, grantor or creator. The second is the trustee. The trustee is the person who manages the trust. The third are the beneficiaries. The beneficiaries are the persons who have the right to the income and/or principal of the trust. The fourth is the property and assets of the trust.

A trustee is a fiduciary. A fiduciary must act in the beneficiaries’ best interests. If there is a conflict between the interests of a beneficiary and the interest of the fiduciary; the interest of the beneficiary must prevail.  Sometimes the conflict is between the interests of different beneficiaries: the trustee must deal with such conflicts if they arise.  An example of a conflict between beneficiaries would be that of a second wife who is the current beneficiary of the trust and the children from the first marriage of the deceased husband who will receive whatever is left in the trust upon her passing.  The wife’s interest in supporting herself may be in direct conflict with the children’s interest in maximizing their inheritance upon the passing of the wife.

The trustee must read the trust document and follow its terms. A trustee would be wise to have an attorney assist him in understanding the trust and his obligations under the trust.

The trustee must open accounts in the trust’s name.  The trust will either have a separate tax identification number or sometimes the tax identification number is the Social Security number of the person who created the trust. The trustee must never commingle her assets with those of the trust. The trustee must keep very good records of all transactions involving the trust so that the trustee can show the beneficiaries of the trust that she handled her job properly. Good records are also necessary so that the proper tax filings can be made.

The taxation of trusts can be complex. The trustee is responsible for making sure that all taxes involving the trust are paid: she can be held personally liable if they are not paid. The trustee should hire a good accountant upon becoming trustee.

The trustee should keep the beneficiaries informed of her administration of the trust. Good communication can avoid disputes, misunderstandings and lawsuits. Beneficiaries who do not know what is going on tend to assume the worst. The trustee should send the beneficiaries a copy of the trust. Beneficiaries should also be sent accountings on an annual basis so they know what is going on with the administration of the trust.  An accounting tells the beneficiaries what assets and property are in the trust and how the trustee administered them.

In New York, unless the trust states otherwise, the trustee must invest the assets in accordance with the Prudent Investor Act. Even when the trust does not require investing in accordance with the Prudent Investor Act, the trustee must manage the assets prudently. The Prudent Investor Act requires the trustee to “exercise reasonable care, skill and caution to make and implement investment and management decisions as a prudent investor would for the entire portfolio, taking into account the purposes and terms and provisions of the governing instrument.”  A trustee should hire a skilled financial planner who will give her a written investment plan. Placing the funds into a money market account or similar type of “safe” investment is probably in violation of the Prudent Investor Act. If the trust assets are going to be held for a significant period of time, the trustee should probably diversify the trust assets with the help of a financial planner.

When the trust terminates, the trustee should render an accounting to the beneficiaries and have them sign a receipt and release, discharging the trustee from her duties.

The purpose of this article is not to give legal advice but to give general information to a trustee about performing his or her obligations as trustee. The trustee should always consult with an attorney about the specific trust and his or her specific obligations with respect to same.