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What are the Duties
of a Trustee?
Introduction:
As discussed in our article on
Wills and Trusts,
trusts have become a common method of estate planning for most citizens
of the United States. They provide tremendous flexibility in estate
structure, allow changes to be made in the plan to adjust to new
circumstances even after a death, and save probate fees and at times
certain taxes. As seen in our article on the
Executor
Duties, a fiduciary duty applies to the actions of the
Trustees who must carry out the instructions imposed in the trust
instrument or face personal liability.
This article shall briefly outline the
duties a Trustee normally encounters when assuming the office of
Trustee.
The Trust Instrument:
A Trust is merely one form of contract
in which the Settlor (also sometimes called the “Trustor” or “Grantor”)
creates a document (“Trust”) which appoints a person to take care of
another person. The person appointed is the Trustee and the person for
who the benefit is created is the “beneficiary.” Unlike most contracts,
however, the law and the courts impose upon the Trustee a fiduciary
duty, the highest duty known to law, and the Trustee can find him or
herself subject to such liabilities even decades after the alleged
wrongdoing. The reader should read our companion article on
fiduciary duty.
The Settlor can limit the obligations
and to some extent even the liability faced by the Trustee by
appropriate wording in the Trust. The key is to balance some reasonable
limit on the Trustee’s liability with adequate protection to the
beneficiaries. It is to be remembered that the beneficiaries may be
children or incompetents and not capable of protecting themselves and
the limitations of liability may increase their exposure. It is also to
be remembered that quite often Trustees die or become unwilling to act
and successor Trustees are appointed and those full liabilities may be
necessary to protect the beneficiaries from the new Trustees. .
The Grantor of the trust can determine
the extent of the Trustee's powers in the trust agreement or in the
will. The Trustee must thoroughly understand what his or her duties are
and obtain such legal and tax advice as necessary to carry out the duty
appropriately. The Courts make it clear that not only is the Trust to
compensate the Trustee for obtaining such advice, but that failure of
the Trustee to obtain appropriate expert advice can be grounds for
claims of breach of fiduciary duty.
As one Trustee put it, “My job is to
follow directions but what that means is not always simple. Thus my job
is to find the right people to make sure I follow the directions
correctly.”
Basic Duties:
The duties of a Trustee may vary from
state to state, but in general, a Trustee's duties include the
following:
1. The Trustee has a duty
to carry out the trust in accordance with the terms of the trust or
will.
2. He or she has a duty
not to delegate the Trustee's duties to another person-any duty which
calls on him to exercise skill and judgment can not be delegated, such
as investment responsibilities. This duty does not prohibit him or her
from hiring professional experts to evaluate the investments for their
suitability to the trust.
3. He or she has the
duty to exercise a reasonable degree of skill and care when managing the
trust assets.
4. He or she owes the
highest duty of loyalty to the beneficiaries to administer the trust
solely in their best interests, and put aside his or her own
self-interests. No “conflicts of interest” are allowed at any time and
full disclosure of any potential conflicts of interest must be made.
5. He or she has a duty
to possess, protect, and preserve the trust property. He or she must
also defend the trust and the beneficiaries against anyone who would
challenge the validity of the trust or seek to claim trust assets.
6. He or she has a duty
to separate and set aside the trust property and is required to keep the
trust property separate from his own property. If the Trustee should
co-mingle his property with the trust's property, he or she is liable
for any losses that could result from the co-mingling.
7. He or she has a duty
to make the trust property productive. He or she must act in a prudent,
or sensible manner when it comes to investing, acquiring, selling, and
managing the trust property. Appropriate tax planning for both the Trust
and the beneficiaries is part of this duty.
8. Depending on the terms
of the Trust instrument, the Trustee normally must file with the Court
an accounting, often every other year, indicating income and outgo and
status of all assets.
9. Finally, the Trustee
has the duty to treat all of the beneficiaries impartially. He or she
must not favor one beneficiary over another. If he or she is unable to
remain impartial, and exercise his or her Trustee duties in good faith,
he or she may be liable for any harm against the beneficiary.
Conclusion:
The above is merely a brief outline of
the most general duties imposed upon a Trustee. Any responsible person
will take the time to carefully investigate the obligations and assets
proposed to be placed at her or her disposal prior to assuming this
significant responsibility. While it is a great compliment to be
nominated a Trustee by a Grantor, it is also a potential liability and
requires the same degree of care in deciding whether to assume it as
will be required to carry the duties successfully.
It may very well be the most important
task one is asked to carry out in one’s life-a degree of trust is
demonstrated that eloquently indicates that someone considers the
potential trustee a trust worthy person. Whether that means one accepts
the obligation depends on one’s own ability to devote the attention and
time to carry out the duties appropriately. A good first step is to read
the proposed trust and discuss the responsibilities with experienced
professionals. |
