In our experience, most persons named as a trustee are non-professional trustees. In other words, the role of trustee is typically filled by a family member, either a spouse or a child, or a trusted friend. As a non-professional trustee, most persons nominated have very little idea of what is expected of them or the liability they take on by agreeing to act as trustee. This article will assist those who are either currently serving or have been nominated to serve as successor trustee. This discussion is not applicable to a person serving as trustee of a trust which he or she created to hold their own assets.
It is critical you understand your duties and responsibilities because a failure to carry out each and every duty with 100% accuracy with the terms of the trust could cause you to be personally liable for any damages caused by your failure. It is our experience that trustees who take on these responsibilities with the belief that they are going to be sued by a beneficiary will be more attentive to properly carrying out their duties and will therefore be better able to withstand a charge of a failure to carry out their duties.
This list of duties is not meant to be exhaustive. If you have any questions or do not understand any aspect of these duties, you should meet with your attorney to discuss your questions. You will be best served by consulting with an attorney whose practice is focused primarily in the area of estate planning. Retaining qualified legal counsel to assist you in carrying out your duties is essential to properly administering the estate. This is not an area where “do-it-yourselfers” fare well; rather, they often end up personally liable to the beneficiaries. This results in the successor trustee using their personal assets to account to the beneficiaries for their actions (or inactions). Additionally, these duties and liabilities are not specific to the Trust in which you are named as successor trustee. The Trust document itself may have different terms. Your attorney should review the Trust with you so you understand the terms of the specific Trust.
A. YOUR DUTIES
In the absence of an express provision of the trust stating otherwise, these are the duties of the successor trustee:
1. Duty to Administer the Trust. Upon acceptance of the trust, you are under a duty to the beneficiaries to administer the trust. Simply because you’ve been nominated does not mean you have to serve as trustee. If you choose not to serve, a written notice of such intent to not serve should be given to the beneficiaries. Once accepted, however, you accept responsibility for administering the trust as a prudent person would, exercising care, skill and caution. This duty to administer applies even though you do not receive compensation for your services, whether voluntarily or under the terms of the trust.
2. Duty of Loyalty. If you agree to act as trustee, you are under a duty to the beneficiaries to administer the trust solely in the interests of the beneficiaries. The fundamental principal of a trustee is that you’ve been entrusted with someone else’s property for which you are accountable. It makes sense then that you cannot act in any manner that will benefit yourself to the detriment of the beneficiaries. Additionally, you are not permitted to purchase trust property (or sell it to your spouse, descendants, siblings, etc.), even if you pay a fair price, unless the trust authorized such sale, a court authorized such sale, or the beneficiaries consented to such sale.
3. Duty Not to Delegate. You are under a duty not to delegate work to others unless a prudent person of comparable skills would delegate. If you choose to delegate work, you must exercise reasonable care, skill and caution in selecting an agent, determining the scope of the delegation, and periodically reviewing the agents’ performance.
4. Duty to Keep and Render Accounts. This duty is typically where most trustees fail. A fundamental responsibility of a trustee is to render clear and accurate accounts for the assets which have been entrusted to you. You absolutely cannot refuse if a beneficiary demands that you account for every single penny of trust assets. In most instances, even if the trust does not require it, you will want to periodically account to the beneficiaries because it evidences to the beneficiaries that you are not concealing anything thereby decreasing the chances that a beneficiary will feel the need to sue just to get information. Further, it is much easier to account for short time periods than for a much longer one, such as when a beneficiary asks for an accounting after the passage of several years potentially. It should go without saying that receipts of all trust expenses should be kept. Your attorney will discuss with you the trust requirements for accounting to beneficiaries. Many trusts waive this requirement; while other trusts require an annual accounting. Your attorney will assist you with this process.
5. Duty to Inform and Report. You have a duty to any “qualified” beneficiary to provide certain information. Your duty is to keep these qualified beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Promptly after accepting the role of trustee, you must notify such beneficiaries of your acceptance, and provide your name, address, and telephone number. If you’ve been named trustee of an irrevocable trust or of a revocable trust that has become irrevocable as a result of a death, you must promptly notify the qualified beneficiaries of the trust’s existence, the identity of those who created the trust, and their right to request a copy of the trust instrument. A beneficiary may waive his or her right to this information, but may later withdraw such waiver.
6. Duty to Invest Prudently. You are under a duty to care for the trust property as would a man of ordinary prudence when dealing with his own property. That is not to say that you should treat the trust property as you would your own property. You may still be held liable for a loss caused by failing to provide use the care and skill of a man of ordinary prudence even though you may have exercised all the care and skill of which you were capable. On the other hand, if you have a greater degree of skill than that of an ordinary man, you are liable for a loss resulting from your failure to use such skill.
The circumstances you are required to take into consideration in investing or managing trust assets include general economic conditions, possible effect of inflation or deflation, expected tax consequences of investment decisions or strategies, the role that each investment plays within the overall trust portfolio, expected total return from income and appreciation, and other resources of the beneficiaries, needs for liquidity, regularity of income, and preservation or appreciation of capital. You must make reasonable efforts to verify facts relevant to the investment and management of trust assets. The test for determining whether you acted prudently is based upon the circumstances as they reasonably appeared at the time a decision was made and not at some subsequent time when other parties have the benefit of hindsight. And not surprisingly, ignorance of the terms of the trust is not a defense to liability.
7. Duty to Diversify. You have a duty to diversify the investments of the trust unless you reasonably determine that, because of special circumstances, the purposes of the trust are better served without diversifying.
8. Duty to Take and Keep Control. You are under a duty to the beneficiaries to take reasonable steps to take and keep control of the trust property. This area is perhaps the most difficult to properly administer and is by far the source of most trust disputes. If personal property such as cars, jewelry, and other personal items are part of the trust property, you are under a duty to take and keep possession of those items, and to maintain those items. Beneficiaries are not entitled to possession or control of any item except as provided in the trust. You should take and keep exclusive control of all trust property unless it is reasonable to entrust possession to an attorney, broker, banker, of other agent.
9. Duty to Preserve Trust Property. You are under a duty to use reasonable care and skill to preserve the trust property. You should not carelessly allow trust property to be lost or stolen, and where appropriate, insurance should be maintained.
10. Duty to Enforce Claims. You are under a duty to the beneficiaries to take reasonable steps to realize on claims which you hold in trust. In other words, if you in your capacity as trustee have a valid claim against another person, whether arising out of contract or tort, you must pursue the claim. If, however, it reasonably appears that a claim cannot be collected in full, or where it is doubtful that the claim is enforceable, you can properly enter into a settlement agreement.
11. Duty to Defend Actions. You have a duty to defend actions which may result in a loss to the trust estate, unless under the circumstances it is reasonable not to make such defense. For example, if a claim is made against you as the trustee and you lose, you have an obligation to appeal to a higher court if under all the circumstances it is reasonable to do so. You may also pay a claim, even though the claim does not appear to be enforceable, if the costs and risk incurred in defending the claim would be such that it is not reasonable to contest the claim.
12. Duty to Keep Trust Property Separate. In the same thread as keeping accurate accounts of the administration, you also should not commingle trust property with your own property nor with any other non-trust property. Separate accounts with appropriate tax ID numbers should be set up to hold all intangible assets.
13. Duty to Make Trust Property Productive. You have a duty to use reasonable care and skill to make the trust property productive. If the trust owns land, you are normally under an obligation to lease it or to manage it so that it will produce income. You are not required to make real estate productive if the trust provides that the property is to be distributed to another party, if the trust provides otherwise, or if the land is undeveloped and cannot be leased or otherwise made productive without making improvements which you are not empowered to make. Furthermore, you have a duty to invest trust funds so that the funds will produce an income.
14. Duty to Pay Income to Beneficiary. When a trust is created to pay income to a beneficiary for a stated period, you are under a duty to the beneficiary to pay to him at reasonable intervals the net income of the trust property. You may withhold a reasonable amount to meet present or anticipated expenses which are properly chargeable to income. If, however, the trust provides that you have discretion to withhold income, you have no duty to pay it to the beneficiary.
15. Duty to Deal Impartially with the Beneficiaries. When there are two or more beneficiaries of a trust, you have a duty to deal impartially with them. You cannot act in a manner that is designed to benefit one beneficiary to the detriment of another. This rule is particularly applicable in instances were you, the trustee, are also a beneficiary.
16. Duty with Respect to Co-Trustees. If there are several trustees, each is under a duty to the beneficiaries to participate in the administration of the trust and to use reasonable care to prevent a co-trustee from committing a breach of trust or to compel a co-trustee to redress a breach of trust. It is ordinarily a breach of trust for one co-trustee to allow another co-trustee to have such control of the trust property as to enable him to misappropriate it. Accordingly, trust property should be registered in the name of all trustees and if one co-trustee has reason to suspect that another co-trustee is committing or attempting to commit a breach, he must take reasonable steps to prevent him from doing so. If you are one of several trustees and you do not agree with a decision that is made by the other trustees, there is typically a process through which you can evidence your disagreement and be free of any fear of liability for the action taken.
B. YOUR LIABILITIES IN THE EVENT OF A BREACH
If you are found to have breached any of these duties (which is also sometimes referred to as a “breach of trust”), a beneficiary can file a lawsuit seeking:
1. To Compel You to Perform Your Duties. This is nothing more than asking a court to make you do what you were supposed to have done in the first place. However, this may have personal financial consequences.
2. To Enjoin You from Committing a Breach of Trust. If it was known that you were about to breach one of your duties, a beneficiary can ask a court to order that you not do so. Again, this may have personal financial consequences.
3. To Compel You to Redress a Breach of Trust. In other words, if it is shown that you have breached one of your duties, to take corrective action which would potentially include making the trust whole for any damages suffered. If you commit a breach of trust, you are chargeable with any loss or depreciation in value of trust property resulting from the breach of trust, as well as any profit made by you through a breach of trust.
4. To Require an Accounting. A court may order that you account for your actions in order to determine the severity of any breach that may have occurred.
5. To Remove You as Trustee. Before you can be removed as trustee, there must be shown to have been a breach of your duties. Alternatives to your removal include the appointment of a special trustee to act in your place until a decision can be made about your removal, or you may be suspended.
6. To Reduce or Deny You Compensation. In the event of a breach of the trust, a court may reduce your compensation or deny it entirely, depending on the severity of the breach.
7. Expenses and Attorney’s Fees. In the context of a breach of trust, the court, as justice and equity requires, may award costs and expenses, including reasonable attorney’s fees, to any party to be paid by another party or by the trust.
C. YOUR DEFENSES
There are several defenses available to a trustee when charged with a breach of the trust. They include:
1. Beneficiary was Given Notice. Generally, a beneficiary may not sue a trustee for a breach of the trust more than one (1) year after being informed of the circumstances giving rise to a potential claim of a breach, and informing the beneficiary that they have one (1) year in which to file a claim. This limitation only further stresses the need to account to trust beneficiaries at least annually to prevent suits for events that occurred many years before.
2. Reasonable Reliance on Trust Instrument. A trustee who reasonably relies on the terms of the trust is not liable to a beneficiary for a breach of the trust to the extent the breach results from the reliance. This pivotal issue with this defense will be the reasonableness of your reliance.
3. Beneficiary Consent or Ratification. A trustee is not liable to a beneficiary for a breach of trust if the beneficiary consented to the conduct constituting the breach, released the trustee from liability for the breach, or ratified the transaction constituting the breach.
There are a few additional items of which you need to be aware:
1. Accountability for Profits in the Absence of a Breach of Trust. You are accountable for any profit made by you, even if the profit does not result from a breach of trust. If you enter into a transaction intending to make a profit and there is no breach of trust, you nevertheless may not retain the profit for yourself.
2. No Liability for Loss in the Absence of a Breach of Trust. You are not liable to the beneficiaries for a loss or depreciation in value of trust property, or for a failure to make a profit, if the loss or failure to make a profit did not result from a breach of trust.
This is a general article meant to give you an outline of the ordinary duties & liabilities of successor trustees. Trusts may have additional or different duties & liabilities than discussed here. This article does not constitute legal advice. You should consult a qualified estate planning attorney prior to accepting any nomination as successor trustee.