Dennis B. Sullivan, Esq., CPA, LLM
Estate Planning & Asset Protection Law Center of Dennis Sullivan & Associates
888 Worcester Street, Suite 260
Wellesley, MA 02482
Member of the national ElderCare Matters Alliance
6 Mistakes Your Trustee Can Make That Can Spoil Your Trust
One may feel honored to be appointed as a trustee, but there are several legal duties and responsibilities the job carries with it. There are several ways a trustee can ruin a trust and destroy a beneficiary’s inheritance. This article will discuss some of the most common errors we see.
Error #1: Not Properly Accounting for Trust Records
Most states, including Massachusetts, require trustees to provide regular accountings to the trust beneficiaries; current, future, and potential future beneficiaries. These accountings must contain detailed records of all income received by the trust as well as all distributions the trust makes. While this task may seem simple, if the trustee mucks this up, even once, they leave themselves open to a potential law suit by beneficiaries, which they will be forced to pay for out of their own pockets.
To avoid this potential pitfall the trustee should consider hiring a professional CPA and/or attorney with experience in the field of trust administration. The trust records will likely be sufficient and the trustee, by hiring a professional, limits their personal liability for errors.
Error # 2: Failing to Diversify Investments
Many trustees decide not to reinvest trust assets, such as stock, that have served the trust well and earned a lot of money over the years. In cases where the trust holds stock in a company owned or run by the dearly departed the decision to reinvest assets can be even more difficult.
It is the duty of the trustee however to make sure that the trust’s assets are diversified and invested in such a way as to create income for the trust.
Investment management is the most litigated area of trust administration. The process can be long and difficult and lead to significant trust assets being spent on legal fees rather than being paid to beneficiaries. Following the Prudent Investor Standards set forth by the Center for Fiduciary Studies will help aid trustees in meeting their fiduciary investing responsibilities.
Error #3: Making Biased Distributions
Trustees owe a fiduciary duty to current beneficiaries as well as remaindermen (future beneficiaries). Many times, the interests of the current and future beneficiaries are not the same. Current beneficiaries may want to see the trustee invest in high yield securities while the future beneficiaries would like to see a safer investment with a lower yield. How does the trustee balance the interests of both parties? A a trustee, especially if they are a family member, may, knowingly or unknowingly make distributions in favor one beneficiary over the others. It can be especially difficult for a family member trustee to set aside their biases, but the trustee owes the same duty to all beneficiaries.
Error #4: Expecting a Pay Day
Some trustees believe that their role as trustee will lead to a quick payday. This is generally not the case however. It can take a lot of time and effort for the trustee to be paid because the process gives all beneficiaries the opportunity to voice their complaints about the job the trustee has done.
To avoid long arduous litigation, it is advisable that the trustee set up a schedule of fees, signed off on by all the beneficiaries.
Error 5: Having a False Sense of Security
The role of trustee carries with it unlimited liability. Anything that the trustee does improperly, whether it be on purpose or by accident or by simply not knowing their responsibilities, can lead to the trustee being sued and forced to pay damages out of their own pocket. The trustee can be liable not only for money lost due to their actions but also money that could have been earned had they acted correctly.
Many assume that because the beneficiaries are family members they will be insulated from being sued. The reality is however, that, many family member trustees end up in court. A trustee should never assume they will not be held liable for their actions simply because the beneficiaries are family.
Error 6: Not Knowing When to Go to Court
Trusts are often used to avoid the necessity of having to go to court to distribute an estate. There are situations when a trip to court can save the trustee a lot of trouble. If the trust documents are ambiguous and one course of action will benefit one group of people and another course of action will benefit another group of people, the trustee should not make a decision, because they are likely to end up in court explaining their decision. The trustee should file appropriate documents with the court and let a judge decide how to proceed.
Selecting a trustee who is experienced and financially savvy is important when considering who you should appoint.
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