February 29, 2016
Flattered to be named a trustee? Curious as to what it all means? Great, we will do a number of blog posts on the duties and powers of a trustee. This is the first such blog post.
Trusts are used for a multitude of purposes. Estate planning, charitable gifts, disability planning, tax reduction and avoidance of probate are but a few uses for trusts. Despite these different purposes, the trustee has similar duties derived from the trustee’s status as a fiduciary.
A trust is a legally binding agreement made by a person that formed the trust (the “Grantor” or “Settlor”) and a person appointed as trustee by the Grantor, to hold property as a fiduciary for the benefit of a third person or persons, the beneficiary or beneficiaries.
Because the trustee is a fiduciary, the trustee has responsibilities that are derived from the unique relationship with the Grantor and beneficiaries. The duties and obligations of the trustee are spelled out by state and federal law and by the terms of the trust document. What are these duties?
Duty to Follow the Trust Terms
A trustee must follow the terms of the trust. For example, the trust may allow distributions to a beneficiary only under very specific circumstances. The trustee must follow the intent expressed in the trust unless there is ambiguity or an absence of direction. In such instances of ambiguity or lack of direction, the trustee should seek guidance from a qualified attorney or a court.
Duty to Administer with Skill and Care
A fiduciary is held to a high standard of performance. A trustee must exercise the same skill, care and diligence a prudent person familiar with the job of trustee would be expected to exercise. Diversification of trust investments is an example of the exercise of the duty of care.
Duty to Account
Most states have requirements that a trustee provide beneficiaries with a written accounting of the assets, liabilities, investment performance, receipts and disbursements of the trust. The trust agreement may alter the statutory provisions by requiring more or less frequency and detail. An accounting can be very important if a trustee wants to avoid liability to the beneficiaries for failure to execute trustee duties properly. A trustee may seek protection and finality by asking a court to approve any accounting or any specific action taken by the trustee. Where there is a change in trustees, the new trustee generally wants the former trustee to account so that the new trustee can commence working with full knowledge and a clean slate.
The duty to account incorporates a duty to keep accurate records. Where a trustee has discretionary powers of distribution, the exercise of discretion should be supported by some documentary evidence.
Duty of Loyalty and Avoidance of Conflicts
The trustee may not put his or her personal interests ahead of or in conflict with the trust beneficiaries. The trustee cannot use trust property for personal gain even if there is no loss to the trust. For example a trustee may not borrow from a trust even at a favorable interest rate. Of course, the trust agreement may allow for deviation from this absolute duty to avoid conflict of interest. This may happen where the trustee is also a beneficiary or is related to a beneficiary. The trustee should consult a qualified attorney with respect to any transaction which may fall within this rule.
Duty of Impartiality
Often a trust has several beneficiaries. There may be current lifetime beneficiary and remainder beneficiaries who participate only after the death of the lifetime beneficiaries. The trustee must balance the interests of all beneficiaries when making distribution and investment decisions.