A Trustee is a Fiduciary
For those who have been designated as the Trustee of a Trust, the legal and financial responsibilities can seem overwhelming. Trustees are fiduciaries, which means they owe a duty of good faith and must exercise the highest standard of care in managing trust money or property.
It becomes especially difficult when there is discord among beneficiaries, when a trust is not properly funded, when there are concerns about undue influence, when financial institutions erect obstacles to moving money and for an infinite number of other reasons.
As a fiduciary, a trustee can be held personally liable for mismanaging the administration of the trust. This risk includes both civil and criminal penalties. So it’s especially important for persons who find themselves as trustees to make sure they know what they are doing, and if they are unsure, to retain legal counsel. The fees of an attorney will usually be paid out of trust assets and the assurance that the trust is being properly administered is well worth the cost of counsel. Moreover, having an attorney involved often diffuses the contentious behavior of beneficiaries and relieves trustees of emotional tension.
So what is Trust Administration?
There’s a lot to it, but essentially you have to review the trust instrument itself to understand the scope of duties and power that the trustee has under the trust. The power can be conservative (limited) or liberal (expanded) or somewhere in between. Once you understand the power and the responsibilities, you can start to understand its administration.
Many dense books have been written about trust and estate administration. So it would be futile to try to tell you everything you must know in this forum. Below is a list of matters that should be considered when administering a trust. The list is not exhuastive, nor is it exclusive. It’s merely intended to give trustees some idea of what they are in for when they accept the responsibility that comes along with administering a trust?
- What kind of trust is it? Revocable, irrevocable, special needs trust, testamentary trust, insurance trust, a credit shelter or A-B trust, and so forth?
- What are its provisions? Does it have remarriage protection clauses, spendthrift provisions, divorce protection, care provisions for minors, specific personal property and real property allocations?
- What rights do beneficiaries have? How often do you have to communicate with beneficiaries? What must be communicated to beneficiaries? What timetable must be followed for distributions? How do you distribute assets from multiple sources? Are you required to obtain appraisals, conduct estate sales, liquidate assets, pay for costs to get property into the hands of beneficiaries?
- Can you obtain waivers from beneficiaries? If so, what should they say and if they won’t cooperate, what recourse does the trustee have?
- Is the trust ongoing, meaning even after the assets have been distributed, are there still ongoing obligations the trustee must fulfill (e.g., administration of a child’s trust until that child reaches a certain age)?
- What does a trust inventory statement look like? How do you tell the difference between a non-trust asset and a trust asset? How do you re-title assets in the name of the trust? How do you deal with life insurance, pension plans, IRAs, survivorship property, payable-upon-death property?
- Will the trust be set up on a calendar year basis or fiscal year basis for purposes of tax filing? When you do file, what do you have to report?
- What ongoing obligations does the trustee have to maintain real estate and organize personal property?
- At what point do you have to engage the probate court (e.g., preserving the right to probate a will, notifying creditors through publication, obtaining guardianship or conservatorship orders)?
- When does the trust end? How do you distribute trust assets? Should you keep money in reserve? What types of receipts do you need to obtain from beneficiaries? What final correspondence do you need to advise the IRS the trust is terminated?
Again, this list merely scratches the surface of the many issues involved with trust management. The intelligent approach to trust management is to allow counsel to guide you through the process so you don’t make catastrophic mistakes along the way. It’s definitely worth the cost and the peace of mind that comes along with it.