You may have been named a successor trustee of your parent’s or your spouse’s trust. I am often asked the question by successor trustees, “What are my responsibilities?” Well your most important responsibility is what is called your fiduciary duty.
A fiduciary is someone who handles funds or property of another. As a trustee, you are handling funds and property for the beneficiaries in accordance with the terms and conditions of the trust. Not only do you have a fiduciary duty to follow the instructions in the trust, you have the fiduciary duty to collect, protect and preserve trust assets for the beneficiaries. If you breach that duty you can be held liable.
One duty that most people are aware of is, don’t steal the money. If you are the trustee, it is not your money. You are just the holder of the money as trustee for the benefit of the trust beneficiaries. If you steal the money, you have breached your fiduciary duty to both the trust and the beneficiaries. Not only could you be held liable to the beneficiaries, you could go to jail.
There are some other duties that may not seem so apparent. Collecting the assets of the trust might not be so easy, especially if the trustmaker did not keep a list of trust assets. I recommend that if you have a trust, keep a list of all your trust and non-trust assets. That list should be easily accessible to your successor trustees.
My clients regularly tell me how much work it is to prepare a list of their assets, and it is their stuff. Just think how much work it would be for your successor trustees to attempt to locate and prepare a list of all your trust assets when it is not their stuff.
Once you as successor trustee have collected and accounted for all of the trust assets, you must protect and preserve them. That includes managing the assets of the trust to minimize losses. Michigan has adopted the prudent investor rule. The prudent investor rule states that you as trustee have to invest and manage trust assets as a “prudent investor” would, taking into account the instructions in the trust and the circumstances surrounding the trust. You as the trustee also must exercise reasonable care, skill and caution.
This is a default rule in Michigan that can be altered or eliminated in the trust document. If you do not have the basic investment knowledge to comply with the prudent investor rule or other standards set forth in the trust, hire a financial professional. Your financial advisor can oversee the financial assets and invest them in accordance with the prudent investor rule or, if different, the instructions in the trust.
If there is real estate in the trust, you have to make sure that any buildings are maintained and kept insured, the rent is collected and the taxes are paid. If you do not have the skills to manage that real estate, hire someone. There are real estate professionals who, for a fee, will manage real estate.
As a trustee, you have to prepare annual accountings to be distributed to the beneficiaries and other interested parties. And there are tax returns to be filed. Make sure if you do not have the skills for annual accountings and tax returns, that you hire an accountant or CPA who can handle and assist you with those duties.
Hire a competent trust attorney who has knowledge and experience in the area of trust administration. You wouldn’t hire a skin doctor to handle your heart surgery, so why would you hire a municipal or divorce attorney to handle your trust administration?
One trap to avoid when you are a trustee is self-dealing. When you are a trustee, you have to hold the interest of the trust assets and trust beneficiaries above your own. You should not do anything that benefits yourself at the expense of other trust beneficiaries.
For example, do not borrow money from the trust. I have seen all too often a trustee who borrows money from the trust fully intending to pay it back and then due to circumstances beyond his or her control, can’t pay it back. Now the beneficiaries are out the money. Borrowing money without the authority to do so is stealing. Remember, stealing can result in jail time.
If you have not been able to sell your house you might think that it would be a great investment for the trust. It would not be a wise idea for you as trustee sell your house to the trust. That would also be self-dealing.
Another example would be in the case of the three daughters that we discussed in last week’s column. When the daughter/trustee grabbed $2.5 million from the charities and cheated Mom out of a million dollars in order to increase her own family’s inheritance, the daughter/trustee was clearly holding her own interests above those of Mom.
But the daughter/trustee did not stop there. Of the 4.5 million now in Mom’s trust that would go to the three daughters’ families upon Mom’s death, Mom’s trust directed that almost $2.5 million would go to her grandchildren. That did not sit well with the three daughters.
The daughter/trustee, in cahoots with her two sisters, petitioned the court to amend Mom’s trust, claiming Mom was incompetent when she set up her trust and did not list who she really wanted to benefit. The daughters claimed that their seven children only needed $60,000 each out of Mom’s trust, which would total $420,000 and the remainder should go, you guessed it, to the three daughters. So instead of getting nearly $2.5 million from Mom’s trust, the grandchildren would get $420,000. The three daughters cheated their own kids out of over $2 million. The daughter/trustee again put her own self-interest over the interests of the other beneficiaries.
The duty of the trustee to follow all the instructions of the trust includes the enforcement of the contest clause, if any. A contest clause imposes a penalty upon a beneficiary who challenges the trust. In the case of the three daughters above, Mom’s trust had a contest clause in which any beneficiary who challenges the trust gets disinherited. The three daughters should be disinherited. However, the three daughters who are now acting together as trustees are not going to enforce it against themselves. This is another example of trustees improperly holding their own interests above those of other beneficiaries.
When you are trustee of a trust, surround yourself with competent assistance. This may include assistance with legal, taxes, accounting, investments, property management and any other needs based upon the assets, the beneficiaries and the instructions in the trust. And to uphold your fiduciary duty, you must keep other beneficiaries’ interests above your own.
By: Matthew M. Wallace, CPA, JD
Published edited February 13, 2011 in The Times Herald, Port Huron, Michigan as: Trustee role not to be taken lightly