Introduction:
Unlike most fiduciary responsibilities undertaken by individuals, one can be appointed a trustee of a trust without making a conscious decision to occupy that role. Anyone can name any adult over eighteen as the trustee in his or her estate plan, not even so advise the nominee and it is not uncommon for the nominated trustee to discover that fact only upon the death of the person creating the trust.
At that point, a sense of duty and obligation often has the nominated trustee agreeing to occupy that role. One can refuse the nomination but that usually means the person nominated as the backup trustee will then assume that role, and that person may be unwilling or unable. And with the other beneficiaries looking on during a time of loss and with the various tasks that must be accomplished requiring prompt action, most persons so nominated agree to serve as trustees.
Once that role is assumed a series of duties suddenly apply to the trustee and these are “fiduciary duties.” As discussed in other articles on this website, this is the highest duty imposed by law and imposes personal liability upon a trustee who fails to perform in an appropriate manner. While the trustee is entitled and indeed encouraged to hire professionals on the part of the trust to give advice, ultimately the duty is personal to the trustee.
One of the duties often not understood by the neophyte trustee is the duty to inquire which is the subject of this article. The duty to inquire does not allow a trustee to remain passive in fulfilling his or her duties. Affirmative action can be required, as discussed below.
Basic Duties of a Trustee:
Recall that in addition to the duty of inquire discussed herein, the basic duties of a trustee are as follows:
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 or her to exercise skill and judgment cannot 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 year, indicating income and outgo and status of all assets.
Or, as one trustee put it to the writer, the trustee must act as to trust assets as if the trust property were his or her own in protecting it, with the added burden that failure to do so imposes personal liability on the trustee. And each one of those duties described includes the duty to inquire.
Duty to Inquire:
The courts have imposed upon the trustee the duty to make reasonable inquiry as to any aspect of the trust assets that a reasonable person would find required. The trustee cannot rely on the defense that he or she was ignorant of a problem or wrongdoing by a third party if the ignorance was based on failure to conduct reasonable inquiry. Indeed, following advice that a reasonable person would find questionable can itself create a failure of the duty to inquire.
As an example, let us presume that the trustee, knowing that her duty is to sell the family artwork to generate cash for income for the teenage beneficiary to go to college, puts the artwork on the market sending it to an art gallery owned by a friend of a friend. The art remains unsold for months and when finally some offers come in all the offers coming in are far below the fair market value that she would have thought appropriate.
The trustee does not want to cause a scene with her friend’s friend and does not contact other art galleries or auction houses or even consult with her attorney or CPA to seek to determine what a fair market value is. Instead, she finally agrees to sell the artwork for fifty thousand dollars. Two years later the beneficiary happens to see on a website that the same artists’ work sold for two hundred thousand dollars. She is angry and confronts the trustee. The trustee answers that she never knew what it was worth, she relied on the gallery she chose to get the right price and she is personally no expert on art.
In short, she responded that she was ignorant of the true price and cannot be blamed for selling it far below its actual value. Sadly for the trustee, she is likely personally liable to the beneficiary.
She did not inquire adequately as to what fair market value was. She could have consulted an art appraiser or other galleries. She could have done historical research as to the past sales of art of the same artists. She could have switched galleries and seen if higher prices were achieved. Instead, she remained passive, relying on a single source of information and selling the easy way. She had a duty to inquire as to the true fair market value and she failed in that duty.
Another example may make the duty clearer. Assume she hires a financial consultant who advises as to appropriate investments in the stock market. Over a two-year period, the investment earns an average of two percent. However, the stock market as a whole appreciates by over six percent. She makes a call to her investment advisor who explains that stocks are by nature capable of different appreciations and she should be patient. Over the next year the investments only make one percent while the stock market as a whole appreciates by five percent. Her duty of inquiry now requires her to approach other advisors, get their advice and perhaps alter the financial advisor. She cannot simply sit back and rely on the advice of an advisor who is clearly not performing as well as the market as a whole.
And such a duty does not merely mean relying on reports without intelligent and active questioning of the information imparted. In the example above, her financial advisor simply indicated that failure to match the market was not remarkable and our trustee simply did nothing more than pose that question. A reasonable person would have asked why fees are being paid to a financial advisor who can not do as well as the market as a whole. At the least, other advisors would be approached. Our trustee’s failure to do so violated her duty to the beneficiaries.
Being a Beneficiary is Not a Defense:
Often a trustee is also a beneficiary of the trust along with several other beneficiaries and we have heard such trustees defend their lack of inquiry on that basis. As one put it, she did behave as if the money was her own since part of it was and if that degree of care was sufficient for her own portion it should be enough for the other beneficiaries.
The law does not work that way. You can fail to protect your own money through neglect or laziness but once you are a trustee your duty does not allow such nonchalance with the money of any other beneficiaries. You owe no particular duty to yourself, but you do owe the highest fiduciary duty to the other beneficiaries.
Relying on Bad Advice is Not a Defense:
A wise old lawyer once commented to the writer that one has a duty to question all that is said to you. “You are not a robot. Your job is to listen critically to whatever is said and question the answers if they deserve questions.” The same is true for a trustee. You cannot “pass the buck” as stated earlier in this article. While you are allowed to have advisors, you remain personally responsible for the decisions made thus must be sure to carefully review their advice to ensure you both understand it and it is reasonable to rely on them.
One trustee relied on his stockbroker for investment decisions but ended up buying and selling stocks constantly. The broker was paid a commission on each sale. Once the commission was deducted the proceeds did not even match the overall stock market performance. Clearly this was a plan that was not working for the trust and the apparent conflict of interest inherent in how compensation was paid to the broker made the trades questionable. In that case, the trustee should (and did) demand that the broker be paid as a percentage of appreciation in the portfolio instead, which the broker refused to do and when the trustee changed brokers performance improved and the trustee was doing his duty.
A trustee cannot see his or her role as passively receiving and reviewing reports or accounting records delivered by others and making decisions based solely on the information received. The trustee must review those reports carefully and pose appropriate questions. And note merely raising questions may not be enough. The trustee must act based on reasonable criteria and seek additional answers if it is warranted.
Be A Gadfly:
Perhaps the most difficult task a trustee can undertake is when the trust owns a business, and the trustee must supervise those operating the business. Such a task is often in a field completely unknown to the trustee and requires a level of supervision that the trustee feels is beyond his or her skill. Hiring appropriate expertise may be necessary. A CPA or attorney may be able to assist. Or even selling the business if the trustee feels that operating it is simply too difficult.
But if the trustee ends up owning the business for any length of time it will be incumbent upon the trustee to be an active owner and to constantly demand reports, financial statements, meetings with officers, etc. The trustee would be well advised to put all questions and comments in writing so that later he or she can show active involvement in the operations of the business.
But being a gadfly (without being merely obnoxious) is actually the task of the trustee when dealing with any of the assets of the trust. Ask the questions, pose the uncomfortable scenarios, demand reports and financials. Only you have the personal duty to protect the trust assets and if you can not do so, you must resign.
Conclusion:
While trustees are entitled to reasonable fees and can seek additional fees for unusual commitment of time, such as selling property or operating a business, those fees should not blind the trustee to the fact that the duties imposed are truly significant and also expose the trustee to personal liability. Too often a trustee is selected by the trustor without considering the experience and ability to cope of the proposed trustee. To suddenly put your elderly husband in charge of operating a real estate management company when all his life he was a plumber may be creating a recipe for disaster. It is risking the assets and exposing your husband to potential liability for breach of fiduciary duty down the road.
In selecting a trustee consider the possibility of appointing more than one so that the duties are shared, and the expertise expanded. If you do not have sufficient nominees available to handle the assets that will be in the trust, consider professional trustees or having instructions to sell the assets so that the trustee is capable of performing his or her duties without undue stress.
It is no favor to appoint someone a trustee. But if you are the person appointed and accept that role, know that your duties require far more than simply listening to others tell you what to do.
One client commented after a year or two of being trustee that she had learned more about finances and business than in the thirty years of marriage to her now deceased spouse and she loved becoming knowledgeable in those fields. One comment she later made was that she wished her husband had begun education of her in those areas while he was alive. “If he thought I could handle these things after his death, why not bring me into the picture before his death?”