So I'm a Trustee - Now What?
Volume 6 • Issue 7 • July 2016
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. In this month’s issue, we will look at the responsibilities of a trustee. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
Regardless of how you became a trustee, you may be asking yourself this question – now what? A trust is a legal relationship that results when a person makes an agreement with a trustee to handle property for the benefit of one or more beneficiaries. The agreement is normally set out in a written document which is called the trust agreement (the trust). A trustee is a fiduciary. A fiduciary is a person who is responsible for taking care of something that belongs to someone else. Fiduciaries have a duty to act in the best interest of the people on whose behalf they handle property.
A trustee’s authority comes first and foremost from the trust. The trust is the instruction manual and should be read with care. The trust may contain specific provisions that take precedence over the general rules that apply to trusts. The second source of your authority comes from the laws of the state where the trust is sitused (or located) as well as federal laws. This can include statutes, regulations, and decisions of courts applicable to trusts. You should consult with qualified advisors in determining your responsibilities as a trustee of the trust.
Your Fundamental Duties as Trustee
Trustees are subject to a variety of duties, some of the duties are summarized below. Please bear in mind that the penalty for your breaching any of these duties is that you will have to pay for any resulting damage to the trust out of your own pocket.
Upon becoming a trustee you are required to notify beneficiaries of the existence of the trust, their status as beneficiaries, and how they can contact you.
You are duty bound to deal with the trust property as a “prudent person” would deal with the property of another. Your actions or inaction will be judged against what a reasonable person would have done in the same circumstances.
As a trustee, you must always act to further the interests of the trust and the beneficiaries. You should not enter a transaction that gives you an opportunity to benefit yourself, much less at the expense of the trust.
Beneficiaries are entitled to be kept reasonably informed about their interests in the trust.
You must keep the trust property separate and distinct from your own property.
You have the duty to protect and preserve the trust assets, and to insure them whenever practicable.
Inventory and Accounting
Upon taking over as trustee, the first thing you must do is gather the assets of the trust and secure the same. As soon as possible, you are required to create an inventory of the assets held by the trust and their respective values as of the date you took over as trustee. Your records should show all assets you receive, hold, and disburse, with the date, amount, and explanation of each. If you keep your accounts carefully, it will be a simple matter for your accountant to find all of the information necessary to prepare trust tax returns, reports to the beneficiaries or reports to the court, if that becomes necessary. Unless prohibited by the trust, you are entitled to reimbursement of your reasonable expenses incurred in the administration of the trust and to a reasonable fee for services rendered.
You should be prepared to render an accounting at least once a year. Depending upon what the trust states and applicable law, any beneficiary may demand such an accounting. You should consult an attorney in this regard. In any event, your annual accounting should be a permanent part of your records of your administration of the trust.
You must keep the trust assets invested appropriately. It is important for you to remember that if you are serving as a trustee for someone other than yourself, you will be held to a higher standard of care than you would be if you were simply investing your own funds. The particular state where the trust is located may also have standards related to the investment of trust assets. Unless the trust provides otherwise, a trustee should diversify the investment of trust assets. Diversified investment of trust assets minimizes the risk that the trust could be impoverished by a downturn in any one stock or any one market segment.
As a general rule, a revocable living trust is not required to file income tax returns. The trustees of all other types of trusts may be required to obtain taxpayer identification numbers and file fiduciary income tax returns with the IRS and analogous forms with the states in which the trusts derive income. Additional tax considerations include a determination of any estate tax liability, the appropriateness of QTIP or other tax elections, and whether an inheritance should be disclaimed. There are deadlines and other issues involved in making these determinations. We strongly recommend that you retain a competent accountant for advice and assistance regarding any and all tax issues and the filing of appropriate returns.
The trust should tell you who is to receive distributions from the trust and when those distributions should be made. It may also give you certain discretionary powers with regard to distributions. Be wary of making interim distributions that are not called for by the trust. Analyze every distribution for possible problems before taking action. There is never any harm in consulting your legal counsel and other advisors if issues come up. If you are presented with an issue that cannot easily be resolved, you always have the option of petitioning a court for instructions.
You should ask the beneficiaries to sign a document in which they approve your accounting, waive any claims against you, and promise to pay any trust expenses that crop up after they have received the trust assets. Remember that a beneficiary’s promise to pay those obligations is only as good as the beneficiary’s ability to pay, and it would be advisable to be very sure that all trust obligations have been paid before you make final distributions.
If a dispute arises, you will benefit greatly from having kept a well-documented file. In addition to your accountings, and the back-up information upon which your accountings are based, your files should include the following:
Records of all other communications between you and the beneficiaries, including such things as copies of all correspondence.
For reimbursements you receive, proof of payment, such as canceled checks, and receipts.
Copies of all correspondence between yourself and your advisors, ask them to at least summarize any advice they give you in writing.
Information upon which you relied in making discretionary decisions.
Avoid dealing in cash. Canceled checks, as well as images of payments received, provide a much more reliable “paper trail” than making notes about cash, even with matching receipts.
The information provided in this newsletter is far from exhaustive. You should not underestimate the significance of your duties and responsibilities and the exposure to liability that comes from the same. Never shrink from asking for legal or other advice. That advice may cost something in the short run, but the cost can be far less than it takes to fix a mistake later on.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.