Naming a trustee of a trust is one of the most important decisions a client must make when planning his or her estate. Serving as trustee requires sound judgment, impartiality toward the beneficiaries, financial ability, integrity and honesty, and, if possible, experience as a trustee. Serving as trustee is not an honor; it is a demanding and time-consuming job.
This newsletter highlights some of the trustee’s duties, provides examples of where problems commonly arise, and raises important questions about what clients should consider when selecting a trustee.
Administering According to the Trust Terms
The most important duty of the trustee is to administer the trust according to the terms of the trust instrument. As anyone who has served as a trustee (or even simply attempted to review their estate own estate planning instruments) will tell you, this is easier said than done. A thorough review of the trust instrument by an attorney should be the first step in any trust administration so that the trustee can avoid making mistakes in administering the document.
The Trustee must keep the beneficiaries reasonably informed about the terms of the trust and the administration of the trust. This includes providing copies of the trust instrument to beneficiaries as well as preparing accountings of all trust activities which need to be given to the beneficiaries at least annually.
The form of a trust accounting is specifically mandated under the Probate Code. If done correctly, accountings can limit the time period a beneficiary can challenge actions by the trustee to 180 days. If done incorrectly, the trustee may be subject to objection by a beneficiary for up to three years.
If a trustee does not give the beneficiaries accountings, a challenge to his or her actions does not have an expiration date and the trustee can find himself or herself liable for his or her actions for many years.
Investments and Management of Trust Property
In addition to the above, the trustee has a duty to invest trust property to make it productive, which includes the ability to hire investment advisors. The trustee may not, however, delegate any action which the trustee can be reasonably expected to do himself. The trustee must also control trust property and separate it from non-trust property, take steps to enforce claims that are part of trust property, and defend actions against the trust.
Distributions to Beneficiaries
Perhaps most importantly, the trustee may be given the power to make discretionary distributions to or for the benefit of a beneficiary. Often the trust will indicate that these distributions should be made for the beneficiary’s health, education, maintenance and support.
With these broad guidelines in mind, does the designated trustee understand the philosophy of the person who established the trust? Will he or she be too generous or too strict with distributions to the beneficiaries? Can the trustee postpone distributions to the beneficiaries if he or she believes it would be in their best interest? These and other questions must be addressed any time a trustee is given discretion over distributions to the beneficiaries.
Sole Trustee vs. Co-Trustees
It is important to remember that two or more trustees can be named to serve at the same time. There are benefits and drawbacks to naming either a sole trustee or co-trustees to manage a trust.
Unless the trust specifies otherwise, all acts of the trustees must be taken unanimously. Naming a single trustee ensures that actions will not be delayed due to disagreement among the co-trustees. It also allows for increased administrative efficiency since only one party must execute documents to take action and, generally, there will be only one attorney representing the trustee.
On the other hand, many clients understand the risks of naming co-trustees but have important reasons for doing so, including balancing the strengths of different individuals and providing additional oversight of trustee actions.
Specifically, a client may name an individual and a professional trustee to balance personal knowledge of the beneficiaries with knowledge of a professional, such as a bank. If, for example, the client wants to name a bank as a co-trustee, a thorough review of the bank’s trustee policies and fee structures should be done.