Roadmap for Serving as a Trustee
Being named as a trustee can be a great honor, but can also be overwhelming. As you will see, a trustee is charged with the task of responsibly applying sound judgment in myriad circumstances, some of which they may not be familiar with. This article seeks to provide general guidance for new trustees:
I. What is a Trust?
A trust is a legally binding arrangement under which a person, known as a “settlor”, “donor” or “grantor”, appoints another person, known as the “trustee”, to hold legal title to property as a “fiduciary” for the benefit of a third person, who is known as the “beneficiary”.
The trust relationship will almost always be memorialized in a trust document or instrument. The trust document will lay out the donor’s intent for how the trust property will be managed. The trust document will identify the trust beneficiaries and provide direction to the trustee for how the trust property is to be distributed. In addition to the dispositive provisions, the trust document should also set forth the duties, rights and obligations of the trustee.
II. Actions and Responsibilities of a Trustee.
A trustee will generally perform or reasonably delegate the following core actions and responsibilities on a regular basis:
- Investment and Management of the Trust Assets. The first action upon becoming a trustee (after reading the trust document, of course) is to become familiar with the assets of the trust. The trustee must manage the trust assets in a manner that is appropriate for the specific trust (i.e., considering the term of the trust, its beneficiaries, the specific trust assets, etc.). Unless otherwise required by the trust document, the trustee will generally have a duty to diversify the trust investments, and to implement an appropriate asset allocation program. The trustee must act as a reasonably prudent investor would act in any given circumstance.
- Distributions. A fundamental responsibility of a trustee is to make distributions to the designated beneficiaries of the trust. The terms of the trust document will dictate whether a trustee is required to make distributions or whether distributions can be made in the discretion of the trustee. Some trusts allow the trustees to make discretionary distributions for any reason, while other trusts will impose certain guidelines on making discretionary distributions (e.g., only for a beneficiary’s “health, maintenance or support”). Unless otherwise provided in the trust document, a trustee must always consider all of the beneficiaries (both current and future) when making a distribution of trust property.
- Record Keeping. The assets of the trust must be kept separate from the trustee’s personal assets. The trustee must keep precise records of all of the trust’s assets, transactions and distributions. In addition, the trustee must keep the trust’s tax records, records of any change of trustees, and records of any decisions or actions relating to the administration of the trust.
- Accounting. The trustees are required to provide the trust beneficiaries with sufficient information to protect the beneficiaries’ rights. Massachusetts law offers several mechanisms for the trustee to keep the beneficiaries sufficiently informed, including providing the beneficiaries with a formal annual accounting showing the initial trust assets, income and principal transactions, and assets on hand at the end of each year (recommended). Depending on the terms of the trust document, a more informal accounting (e.g., providing the beneficiaries with monthly or annual statements for the trust account(s)) will suffice.
- Tax Preparation. There are numerous exceptions to the following general rule, so a trustee should always seek counsel on the tax obligations of each trust. That said, a trust is normally considered to be its own “taxpayer” with its own tax identification number. The trustee is obligated to file income tax returns on behalf of the trust, and pay any estimated or year-end taxes each year.
III. Duties of a Trustee.
In addition to the general responsibilities involved with administering a trust, a trustee is also required to adhere to more global “fiduciary duties”. The fiduciary duties of a trustee are often laid out in the trust document itself, but those and other duties are also incorporated under state law. In general, a trustee must act with prudence and must faithfully carry out the donor’s intentions. More specifically, however, fiduciary duties can be summarized as follows:
- Duty to Administer the Trust by its Terms. A trustee is obligated to administer a trust strictly by its terms, so it is important that the trustee read and understand the entire trust document (including any amendments). Legal counsel can often be useful in interpreting the language of a trust.
- Duty to Invest. The trustee is in charge of managing the assets of the trust. State law governs which investments are appropriate for trusts, but the trust document itself may expand or restrict the type of investments the trustees may hold.
- Duty of Skill and Care. A trustee must administer the trust with the care, skill, prudence and intelligence of a person familiar with the job of serving as a trustee would use.
- Duty to Give Notice. The trust document, or if silent, state statutes, will determine when a trustee must give notice of certain events to the beneficiaries or co-trustees of the trust.
- Duty to Furnish Information, to Account and to Communicate. The trustee has a duty to keep the beneficiaries reasonably informed regarding the trust and its administration. This includes providing information which the beneficiary reasonably requests (including providing copies of the trust document and amendments, accounts, etc.).
- Duty not to Delegate. Generally, a trustee may not delegate to others any act he or she can reasonably be expected to perform personally, particularly acts that involve exercising judgment and discretion. That said, a trustee may employ agents such as attorneys, accountants and investment advisors, with the understanding that the trustee is ultimately responsible to the beneficiaries for the proper administration of the trust, and thus must always make the final decisions regarding the trust.
- Duty of Loyalty. The trustee must always administer the trust property for the benefit of the beneficiaries, and cannot engage in any act that puts his or her personal interests in conflict with those of the trust beneficiaries.
- Duty to Segregate Trust Property. The trust property must be held separately from the trustee’s personal property.
- Duty of Impartiality. Unless otherwise specified in the trust document, the trustee cannot favor one class of beneficiaries over another. This means that the trustee must show impartiality in balancing the interests of current beneficiaries with the interests of future beneficiaries, and must balance the interests of members of the same class of beneficiaries.
- Duty to Enforce and Defend Claims. The trustee has a duty to take reasonable steps to enforce claims on behalf of the trust and to defend the trust against adverse claims.
- Duty of Confidentiality. The trustee should not disclose the terms of the trust, the identity of the beneficiaries, or the nature of the trust assets to anyone who is not a beneficiary of the trust or does not need such information to assist in administration of the trust.
IV. Trustee Liability.
A trustee can potentially be held personally liable for a breach of any of the fiduciary duties described above which result in a loss or damage to the beneficiaries. The courts do not look kindly upon a trustee who acts unreasonably and in bad faith in exercising his or her duties. That said, the trustee is not a guarantor of the trust property, and will not be liable for losses that occur despite judicious performance of his or her duties.
In addition to personal liability for breach of trust, a trustee can be removed by the beneficiaries for failure to faithfully perform his or her duties. In such cases, the trustee may be subject to personal liability for the cost of any related legal proceedings if such failure is the result of willful default.
V. Trustee Compensation.
A trustee is entitled to “reasonable” compensation. In Massachusetts, trustee fees are governed by the terms of the trust document and by accepted standards of reasonableness within the Commonwealth. The criteria for determining reasonable compensation may include: (i) the degree of risk and responsibility assumed by the trustee; (ii) the time required to properly administer the trust; (iii) the value and complexity of the trust assets; and (iv) whether or not extraordinary services were required of the trustee.
For a non-professional trustee, it is recommended that the trustee keep careful track of the time spent administering the trust, and pay himself or herself a reasonable hourly rate. Trustees are also entitled to reimbursement for out-of-pocket costs that have been incurred.
Serving as a trustee requires many skills: attention to detail, oversight over the preservation and prudent management of the trust’s assets, and ongoing communication with the beneficiaries to not only understand their needs, but also ensure the beneficiaries are properly informed regarding the administration of the trust.
It is important to remember that trusts are not static entities – the assets being administered and the needs of the beneficiaries are apt to change over time. As a result, the most vital skill of the trustee is to consistently apply sound judgment in the face of the myriad circumstances which may arise as long as the trust continues.
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