Part 2 of our Serving as a Trustee series
A failure to understand the trustee role and its responsibilities can lead to mistakes by a non-professional trustee. Mistakes can lead to lawsuits, and when family is involved, this is a particularly unpleasant experience.
In order to effectively serve as a trustee, you must understand your fiduciary duties. Even trustees with the best of intentions can create liability for themselves by being unprepared for the job or by not fully understanding their obligations.
Some of the common mistakes family trustees make that get them into hot water:
1. Conflicts of Interest
Conflicts of interest when handling trust assets are a frequent source of trust disputes. A trustee faces a conflict of interest when their personal interests could potentially conflict with their duties to the beneficiaries of the trust. Common examples of mistakes for trustees include:
• Buying or selling assets personally from or to the trust, even if the terms are fair and reasonable.
• Making decisions regarding trust assets in a way that provides for the trustee’s own benefit or is detrimental to the interests of some or all of the beneficiaries.
• Mixing the trustee’s personal money and trust money.
2. Failing to Properly Account to Beneficiaries
The duty to account for the activities of the trust is fundamental. To fulfill this duty, a trustee should create annual accounting reports that include the disbursements and income for the trust. Common mistakes trustees make in this area include:
• Not providing accurate, thorough or timely trust accountings describing the financial activity of the trust.
• Failing to deliver trust accountings to all appropriate people.
Note that failing to keep good, contemporaneous records of the trustee’s administration of the trust can make explaining decisions difficult, needlessly expensive and time-consuming later when questions or disputes arise.
Also note that complying with this duty can provide an additional benefit to trustees, because oftentimes sending trust accountings or trustee reports with an appropriate notice can dramatically shorten the period of time in which beneficiaries can file breach of trust claims against the trustee.
3. Not Following the Trust’s Terms
The grantor forms the trust with intent that the assets will be handled and distributed in a certain way. The terms of the trust reflect the grantor’s intent. A trustee can get into trouble by:
• Misunderstanding the purpose of the trust or the terms in the trust agreement, or from simply not reading the entire trust agreement.
• Failing to follow instructions in the trust agreement and, instead, doing what they believe the deceased grantor would have wanted, even when the action conflicts with the terms of the trust.
• Failing to say “no” to distribution requests that are not permitted under the terms of the trust or are otherwise inappropriate.
• Ignoring the interests of remainder beneficiaries or otherwise favoring one beneficiary or a group of beneficiaries over others.
• Missing filing and other deadlines.
• Not understanding how to work with co-trustees.
4. Failing to “Know What You Don’t Know” and to Hire Help
Trustees who fail to understand their limitations or who lack self-awareness can make mistakes that could lead to litigation including:
• Not consulting with an attorney to assist in trust administration or waiting too long to do so.
• Not consulting with a financial advisor and failing to prudently invest trust assets.
• Not consulting with an accountant and failing to understand the tax environment and how the tax law affects trusts.
Help Is Available for Family Trustees
As a trustee, you don’t have to know everything about everything. Plenty of resources are available to help you fulfill your duties and reduce your exposure to liability and litigation, so seek out professionals to fill in your knowledge gaps. Remember that legal advice is generally a proper expense that can be paid from the trust’s assets, so reach out to your Warner attorney, or contact Laura Morris at lmorris@wnj.com or 616-752-2407, for assistance in serving as an effective trustee.
For more information, see the other posts in our series, “Understanding Your Role as a Trustee for Your Family” and the upcoming post, “Protecting Yourself When Serving as a Trustee.”
