In recent years, many individuals have elected to incorporate a trust into their estate plan. Although wills and trusts are common documents found in many estate plans, the two documents are a world apart. Whereas a will operates to transfer property upon your death, the basic living trust is its own legal entity to which you transfer property during your lifetime. During your lifetime, the property of the trust is used to meet the needs of you and your family. Upon your death, the trust continues to exist and the assets it holds are either distributed to your named beneficiaries or are used to meet the ongoing needs and expenses of your beneficiaries. A trust is overseen by one or more trustees whose job it is (generally speaking) to manage the trust and utilize its assets in such a way so as to provide the maximum benefit to the beneficiaries of the trust. In order to accomplish this task, trustees are given certain powers and responsibilities. These powers and responsibilities are constrained by ethical obligations.
Meet the Trustee
A trustee can be any individual who is of sound mind and who is over the age of 18 years. In many living trusts, the grantor (the person who initially creates the trust) names him- or herself as trustee. This allows him or her to manage his or her assets (which are put into the name of the trust as if the trust owns them) as he or she sees fit during his or her lifetime. If the grantor/trustee is married, he or she may name his or her spouse as either a co-trustee – in which case he or she and his or her spouse will make trust-related decisions together – or as the successor trustee – in which case the spouse will assume the duties of trustee over the trust upon the grantor’s death. The trust may name any number of successor trustees and it may in theory name as many co-trustees at one time as the grantor wishes (as a practical matter, though, there is typically only one and sometimes two trustees at any one time so that trust business can be carried out efficiently).
In cases where the grantor does not have any family member or trusted relative or friend he or she feels comfortable handling the affairs of the trust, the grantor may appoint a professional trustee. As the name implies, a professional trustee is a third-party individual or business entity with knowledge and experience in handling others’ trusts. These individuals or entities can include attorneys, accountants, bank officers, and/or financial institutions. There are certain advantages to having a professional trustee, however these advantages usually come with a higher price tag.
Responsibilities and Ethical Obligations of the Trustee
Before discussing the powers that a trustee can exercise, it is helpful to know that a trustee occupies a position of trust and responsibility. One of the most basic responsibilities of the trustee is to read the actual trust document and take the time to understand its contents. While trustees of different trusts may have the same general responsibilities and powers, the grantor of a particular trust is always free to limit the power or authority that a trustee would otherwise have. A trustee who exceeds the scope or nature of his or her powers may find him- or herself the named defendant in a lawsuit filed by the trust’s beneficiaries.
Some of the other responsibilities placed upon trustees include:
- Keep trust assets separate. A trustee cannot comingle trust assets with any other assets. This not only helps the trustee in maintaining an accurate accounting of the trust’s assets (see below), but it helps the court and beneficiaries know what property the trust has on hand at any given moment. Comingling occurs when a trust asset or property is mixed with property belonging to another. For example, suppose that an investment account in the trust’s name pays a dividend by check for the profits earned by the account. The trustee receives the check but does not want to travel across town to deposit the check with the bank that holds the trust’s money. Instead, the trustee goes to his or her local bank and deposits the check there. Even if the trustee never uses the funds from the check for personal purposes, the trustee has comingled trust assets with non-trust assets.
- Not use trust property for private gain. If the trustee is not the grantor or a beneficiary, the trustee is not permitted to use the trust property for his or her own benefit. Of course the trustee should not steal trust assets, but this responsibility also encompasses misappropriation of assets. A trustee may not (unless the trust specifically says otherwise) use the antique car held in the trust’s name and held for the benefit of the grantor’s minor child to take personal trips or run personal errands.
- Treat all beneficiaries the same. Unless the trust specifies that beneficiaries are to be treated differently from one another (and the trust describes precisely how), the trustee must ensure that all beneficiaries are treated the same. The trustee cannot grant legitimate and reasonable requests from one beneficiary in a timely manner and deny or delay granting legitimate and reasonable requests from another beneficiary simply because the trustee does not particularly care for that beneficiary.
- Invest trust assets in a conservative manner. Depending on the trust and its assets, there may be property the trustee can invest. The trustee must do so in a conservative manner so as to reduce the risk of loss to the beneficiaries. The trustee’s first priority should be to preserve the value of the trust’s assets as much as possible; after this, the trustee may grow the trust’s assets through investing in reasonably safe investments. The trustee does not have to guarantee the trust’s assets against all loss – some loss of value is unavoidable – but the trustee must not take unnecessary risks with the trust’s assets.
- Keep accurate records and make timely reports. The trustee will need to maintain accurate records and provide periodic reports to the beneficiaries as described in the trust. Not only this, but beneficiaries are entitled to an accounting of the trust and its assets. This accounting would show the assets owned by the trust as well as any obligations of the trust and what property or assets (if any) have been recently distributed. To be able to accomplish this responsibility in an efficient manner, the trustee will need to be highly organized. Anytime property is transferred, distributed, or experiences an increase or decrease in value, the trustee should note such in the trust’s official records.
A violation of any of these duties that results in one or more of the beneficiaries being harmed is grounds for the beneficiary or beneficiaries affected to bring a lawsuit against the trustee to seek his or her removal from office.
Powers of the Trustee
In order to fulfill his or her multitude of responsibilities, the trustee is granted certain powers. Typically the trust will set forth the precise powers that the trustee has to carry out his or her office. If the trust is silent on the trustee’s powers, the trustee is usually presumed to possess those powers reasonably necessary to carry out his or her responsibilities, duties, and ethical obligations. In exercising their powers, trustees are given some measure of discretion. For example, where investment accounts are part of the trust, the trustee is permitted to invest the assets in the accounts in a reasonable and prudent manner. If the account experiences a decrease in value because the trustee made informed but ultimately bad investing decisions, the obligation would still be on an upset beneficiary to show that the trustee’s investment decisions were unreasonable.
Powers that a trustee is generally assumed to have include the ability to:
- Hire any advisors or professionals deemed reasonably necessary to assist the trustee. If the trustee does not feel confident in carrying out any of the responsibilities that the trust imposes on him or her, the trustee is permitted to hire those professionals that the trustee reasonably feels are necessary. This may include hiring attorneys, accountants, investment advisors, and/or other professionals that may be necessary.
- Refuse appointment as a trustee or relinquishment of the trustee position. A trustee named in a trust document has the power to either refuse his or her appointment as trustee of the trust or give up the position after he or she has accepted it.
- Incur reasonable expenses: The trustee is bound to encounter certain expenses and costs while carrying out the terms of the trust. A trustee is generally permitted to incur reasonable costs related to the trust’s administration and may incur these without first seeking the permission of any other individual (unless the trustee is actually a co-trustee, in which case the other co-trustee(s) must agree with the decision according to the terms of the trust.
- Lease and/or sell trust property: If this specific power is not mentioned in the trust agreement, most courts throughout the nation will assume the trustee has such a power. Similar to his or her investment decisions, a trustee may determine whether it is in the beneficiary’s better interests to sell real or personal property or lease such property to another. Again, so long as the trustee’s decision is reasonable and prudent, the trustee will not be personally liable for any loss the trust may experience due to a bad decision to sell or invest.
A trustee plays a vital role in a trust – in fact, without a trustee, a trust cannot be administered and beneficiaries cannot enjoy the benefits that are theirs under the terms of the trust. So long as a person is over the age of 18 years and is of sound mind at the time of the appointment, a trustee can be just about anyone. The trustee’s position is primarily one of responsibility and obligation. The trustee’s actions must be for the benefit of the beneficiary and must be reasonably prudent and cautious. While the trustee is not a guarantor that the trust’s assets will always maintain their value, the trustee may be sued if the beneficiaries believe that the trustee is not acting in a reasonably careful manner.