More often than ever, I am asked to consider serving as a trustee - for clients, relatives and friends. Initially, the “ask” is very flattering. It is an honor and privilege to assist those close to you in administering their goals and objectives if they become incapacitated or pass away. However, there are also many significant legal responsibilities and obligations that accompany the role. Some of these duties are as follows:
- Pay bills and expenses of the trust.
- Invest assets prudently, i.e. conservatively, in a way that should generate reasonable growth of the assets with minimum risk.
- Keep trust property separate from the trustee’s own property.
- Not to use trust assets for the trustee’s own benefit (unless the trust authorizes it).
- Keep accurate records, file tax returns and report to the beneficiaries in accordance with the trust documents, usually annually.
- Enforce claims on behalf of the trust and defend actions against a trust.
- Treat the beneficiaries the same, not favoring one over another unless the terms of the trust provide otherwise.
Given these responsibilities and obligations, it should not come as a surprise that problems may occur on occasion and, as a result, trust litigation is a possibility.
There are various types of claims made against a trustee. Examples of the types of claims made against trustees are as follows:
- Breach of fiduciary duty
- Failure to invest prudently
- Breach of duty of impartiality
- Failure to properly administer the trust
- Conflicts of interest
Considering these potential liability landmines, what types of due diligence should a potential trustee perform before accepting or declining a request to serve as a trustee?
- Know and have a good relationship with the beneficiaries. Remember, even though the potential trustee may have an excellent relationship with the Grantor (the person who is likely making the request), the responsibilities and obligations will ultimately be owed to the beneficiaries. The trustee should be comfortable with his/her relationship with those beneficiaries.
- Can the potential trustee be impartial and deal with very different personalities, emotions and agendas?
- Does the potential trustee have the requisite skills to carry out the responsibilities of a trustee? Is the potential trustee organized? Does the potential trustee have the skills to prepare reports? Does the potential trustee have accounting skills? Does the potential trustee have knowledge about various types of insurance policies? If not, does the potential trustee have the ability to put together a team of advisors to perform those duties and obligations?
- Most importantly, does the potential trustee have adequate time to serve as a trustee? Even though the trustee is generally compensated for his/her time, a potential trustee should carefully consider the requirements of the job and whether the commitment involves more time than the potential trustee can realistically devote to the job.
If a potential trustee is satisfied, after he/she has performed their due diligence to proceed, the comforting news is that there may be safeguards and protections available to minimize the risk for a potential trustee to serve:
- The most important protection for a trustee is for the trust to contain a very broad and strong indemnification provision protecting the trustee from liability except in cases involving gross negligence and/or the trustee’s own fraud or dishonesty.
- Insist that the trust contain an exoneration clause in which a trustee’s liability cannot be imposed for the good faith administration of his/her obligations to the trust, even in cases involving the trustee’s own gross negligence .
- Limiting the trustee’s liability to the amount of assets in the trust. However, even if the trust contains such language, beware that certain claims are personal in nature, i.e. breach of fiduciary duty, and may still leave the trustee exposed to personal liability.
- Finally, insist on the trust purchasing adequate trustee insurance to protect the trustee from such claims.
If a potential trustee is still concerned about serving even after the trustee is satisfied that they have the requisite skills, expertise, time, knowledge and relationship with the beneficiaries and the protections outlined above, then politely decline1
and avoid a potential disaster in the making.
Maddin Hauser regularly consults with and advises trustees concerning their duties and responsibilities, as well as beneficiaries and interested parties who question whether or not the designated trustee is adequately and competently performing their duties. We are often sought to prosecute and defend claims involving trust administration and would be happy to answer any questions you may have regarding these issues.
Among the many materials I reviewed in preparing this article, I want to thank my partner, Rob Kaplow, for providing me with his outline from our firm's recent Tax Symposium held on November 15, 2014. Rob and I occasionally work as a yin and yang on such issues, he on the estate planning side and yours truly on the risk management side.