If you have been called upon to serve as a trustee, you have a very important job. The role of trustee is an essential component of successful trust administration. The trustee is the person responsible for ensuring that the terms of the trust document are followed. A trustee is ultimately responsible for managing the trust property and keeping accurate records of all transactions. This is a great responsibility, so here are four common mistakes you need to avoid.
#1: Failing to adhere to your fiduciary duty
Trustees must always manage the trust and trust property with only the best interest of the beneficiaries in mind. Trustees are also subject to certain regulations, such as the Uniform Prudent Investor Act, a law designed to protect beneficiaries from improper investment choices. What this means for you, as a trustee, is that you can be held liable for investment losses or missed opportunities and profits that beneficiaries could have received if you had been more prudent in making investment choices.
Seek professional help
Considering the substantial responsibility placed on trustees, it is wise to seek assistance from a professional including, but not limited to, in the area of investments. Investment management is one of the most litigated issue in trust administration. If disputes arise and beneficiaries file suit, the process can be very lengthy and expensive. That means, a substantial amount of trust assets may be spent on legal fees.
#2: Not remaining a neutral party
As the fiduciary duty requires, a trustee must be able to look past his or her own interests and comply with the terms of the trust document in making all decisions. This may not be as easy as it seems, especially if you are related to a beneficiary of the trust, or if you have an emotional bond with the family in general. A trustee must remain a neutral party at all times and in all transactions.
#3: Failing to provide a complete accounting
The fiduciary duty of a trustee brings with it the need to provide complete and accurate account for transactions involving the trust property. According to some reports, there has been a substantial increase in the number of lawsuits involving trusts. For this reason, it is crucial that a trustee first is aware of the breadth of his responsibilities, and understand the risk for liability. A trustee is not only required to make proper investments and manage trust assets, but also to prepare tax returns for the trust and accountings for the beneficiaries. Every decision made related to the trust property must be documented, especially decisions to approve or deny any distributions. That way, if any disputes arise, you will be prepared to defend your decisions and protect yourself from personal liability.
#4: Forgetting to address the issue of compensation
Trustees are generally entitled to a fee for their services. What constitutes a reasonable fee usually differs from one state to the next. Whether a particular trustee will even request a fee may depend on their relationship to the grantor. Unlike corporate trustees, which have a published fee schedule, an individual may need to negotiate a reasonable fee for their trustee services.
The risk of not discussing fees up front is that years later when the issue of compensation comes up, they may have to go to court to get the issue resolved. In many cases, a trustee will serve for several years without being paid, then later when the time and effort required to fulfill the duties increases, the trustee will seek compensation. If the fee was not discussed up front, there may be some issues with the beneficiaries requiring court intervention to resolve.
Selecting the right trustee
If you are in the process of creating your trust and it is time to select a trustee, there are many considerations to make. This is an important decision. You need someone who will provide careful management of trust assets, exercise the appropriate level of diligence when executing your instructions, and demonstrate the ability to put the interests of your beneficiaries first. Above all, you want a trustee who will build and maintain a relationship with the beneficiaries and their families over the many years required to administer most trusts. Talk to an experienced and qualified estate planning attorney for guidance in choosing the right trustee.
If you have questions regarding trust administration, or any other estate planning needs, please contact the Northern California Center for Estate Planning and Elder Law, either online or by calling us at (916) 437-3500.