by Carol Warnick
We are constantly surprised to realize that the normal, average trustee who is not a professional fiduciary doesn’t really understand what is required of him or her and often makes serious mistakes. You would expect that someone taking over the role of being a trustee would inquire or do some type of research as to what is expected, but unfortunately many new trustees don’t seem to take the responsibility seriously enough, often with disastrous consequences.
The trustee stands in a special relationship with the grantor of the trust as well as to the beneficiaries. This relationship is unique and the trustee should keep that in the forefront of his or her mind. By appointing someone as trustee, the grantor is depending upon the trustee to both honor the provisions of the trust to the best of his or her ability, but also to respond to the needs of the beneficiaries and to maintain their confidence and trust. The trustee must be careful not to do anything which would benefit the trustee to the detriment of the beneficiaries or to ignore the duties and obligations of a trustee. Thus the word “trust” inside the term “trustee” should not be taken lightly.
The obligations of a trustee are defined not only by the trust agreement, but also by state law, some of which is statutory and some of which is common law. State laws may differ from state to state, but some basic premises hold true wherever a trust is being administered. In general, these duties of a trustee are important and can result in litigation, removal, and potentially surcharge if the trustee ignores them.
Some of the general duties of a trustee are set forth below, as taken from “What It Means to Be A Trustee: A Guide for Clients,” published in the ACTEC Journal, Volume 31, No. 1, Summer 2005.
- Duty to Administer Trust by Its Terms. The trust, including amendments, provides a roadmap for the trustee and unless its terms are ambiguous, the trustee must follow its terms. As mentioned above, state law will govern many areas where the trust is silent, so the trustee must be versed in the state law where the jurisdiction is administered.
- Duty of Skill and Care. Skill, prudence and diligence — this is a high standard of performance — higher that one would be expected to follow if administering one’s own assets.
- Duty to Give Notice. The trustee must be familiar with the language of the trust as well as state law to determine when he or she must give notice to beneficiaries, or perhaps a co-trustee. Some examples requiring notice to certain individuals are resignation, delegation or designation of a successor trustee, rights of beneficiaries to withdraw principal at certain times, the naming of a professional investment advisor, of delegation of the investment function.
- Duty to Furnish Information and to Communicate. The trustee must keep the beneficiaries informed about the administration of the trust. This may include information about investment performance, actions of the trustee or anything else reasonably requested by the beneficiary.
- Duty to Account. The laws of most states require that the beneficiaries be given regular accountings reflecting the liabilities, receipts and disbursements of the trust. The form and frequency varies from state to state or the language of the trust document.
- Duty Not to Delegate. Generally, the trustee has the duty not to delegate acts requiring judgment and discretion (typically the trustee was chosen because he or she exhibited good judgment and sound exercise of discretion) unless specifically given that authority in the trust document or by statute. The trustee may hire agents such as attorneys, accountants, investment advisors, etc. but the trustee should not blindly follow their advice. The exception to that would be a Directed Trust, which is beyond the scope of this article
- Duty of Loyalty. The trustee has a duty to administer the trust solely in the interest of the beneficiaries.
- Duty to Avoid Conflict of Interest. The trustee should not use trust property for personal gain and should not use the trust assets in a manner that benefits the trustee personally. The exception to this is when self-dealing provisions are written into the trust for the benefit of trustees who are also beneficiaries of the trust. Even if such provisions are present, a trustee needs to be especially careful of self-dealing transactions and should consider appointing an independent trustee (if the trust or state law allows it) strictly for the purpose of authorizing such transactions.
- Duty to Segregate Trust Property. The trustee must not co-mingle personal funds or any other non-trust funds with the assets of the trust.
- Duty of Impartiality. The trustee must treat all the beneficiaries impartially unless the trust itself instructs otherwise. This becomes complicated when the trustee must balance the interests of the income beneficiaries with the interests of the remainder beneficiaries of a trust.
- Duty to Invest. The trustee has a duty to invest the assets appropriately. Unless otherwise specified, that includes a duty to diversify assets.
- Duty to Enforce and Defend Claims. The trustee must take reasonable steps to defend claims against the trust and to enforce claims the trust may have against others. Part of the decision-making process in determining what is reasonable needs to be an assessment of the costs of enforcing or defending versus the costs to the trust of not taking action on the claim.
- Duty of Confidentiality. The affairs of the trust should be kept confidential except with those who are by law “interested persons” such as the beneficiaries and co-trustees. The trustee should not disclose to third parties the identify or interests of the beneficiaries or the nature of trust assets, unless requested to do so by a beneficiary who may need certain information disclosed to a third party. This duty of confidentiality also extends to personal things about beneficiaries that may come to the knowledge of the trustee in the process of administering the trust.
Any trustee paying close attention to the duties listed above will stand a much better chance of making the trustee experience a positive one and will be much more likely to avoid problems or lawsuits from beneficiaries.