By Attorney Suzanne R. Sayward (January 2011)
We conclude our three-part series on understanding Trusts with a column about what it means to serve as a Trustee. (If you missed the first two columns in this series, visit our website at www.ssbllc.com.)
In my practice, it is very common for clients to name adult children or other family members as successor Trustees to serve upon the incapacity or death of the client. Serving as a Trustee is a privilege and an honor, but it is also an enormous responsibility and can be a time-consuming, challenging job. Most of the time, neither the “appointer” nor the “appointee” has a good understanding of what is involved. The duties of a Trustee are numerous and varied, depending upon the type of trust, the terms of the trust, and the trust assets. This month’s column focuses on five duties common to all Trustees.
1. A Trustee owes a fiduciary duty to the beneficiaries. A Trustee is a “fiduciary,”‘ meaning that he owes the highest duty of loyalty, good faith, and fair dealing to the beneficiaries of the Trust. Generally speaking, that means the Trustee must always act in the best interests of the beneficiaries, not in his own best interest. Examples of actions that would be considered a breach of a Trustee’s fiduciary duty include using Trust assets to invest in a business owned by the Trustee, purchasing real estate from the Trust for the Trustee’s personal use, or personally profiting from his service as Trustee by taking a commission on the sale of real estate. It goes without saying that a Trustee who misappropriates Trust monies has breached his fiduciary duty.
2. A Trustee has a duty to carry out the terms of the Trust. Sometimes clients are under the impression that a Trustee is in the position of making all decisions regarding distributions from the Trust. While some Trusts may grant the Trustee discretion to make certain types of distributions, the Trustee may not act contrary to the terms of the Trust. For example, if the Trust instructs the Trustee to sell all real estate and distribute the proceeds equally among the beneficiaries after paying expenses, the Trustee does not have the authority to do otherwise. The beneficiaries have the right to know the terms of the Trust; therefore, the Trustee may not refuse to divulge information about their interests.
3. A Trustee has a duty to account to the beneficiaries. The Trustee has a duty to keep accurate records of all Trust financial activity and to share that information with the Trust beneficiaries on a regular basis. The reports of financial activity that a Trustee provides to the Trust beneficiaries are called Trust accounts. The Trustee’s accounts should include an inventory of the assets held by the Trust, the value of the Trust assets, the income earned on the assets in the Trust, any gain or loss realized from the sale of Trust assets, and the expenses and distributions paid out of the Trust. The beneficiaries have the right to inspect the Trustee’s account and to object to any item they may find inappropriate.
4. A Trustee has a duty to safeguard the Trust assets. The Trustee is responsible for safeguarding the assets held by the Trust. For example, if the Trustee fails to adequately insure the house and it burns down, the Trustee is responsible and will have to make up the loss from the Trustee’s personal monies. Similarly, the Trustee has a duty to invest the Trust assets in a reasonable and prudent manner. If the Trustee fails to do so and the trust assets lose value, the Trustee can be held responsible. In some circumstances, Trustees must obtain a surety bond from a bonding agent to ensure the beneficiaries will be protected in the event the Trustee fails to adequately protect the Trust assets.
5. A Trustee has a duty to properly administer the Trust assets. The Trust assets must be kept in the name of the Trust and not in the Trustee’s personal name. The Trustee must not co-mingle the Trust assets with her own funds. In most cases, the Trust will have its own taxpayer identification number assigned by the IRS. The Trustee must file all required income tax returns and pay the tax properly owed by the Trust. The Trustee must provide the beneficiaries with the tax documentation the beneficiaries need to file their own income tax returns.
The above represents some of the broad duties that are required of every Trustee. The specific tasks involved in serving as a Trustee are numerous and varied. If you find yourself in the privileged position of being named as a Trustee for a family member or friend, consult with a qualified attorney for advice about fulfilling your duties and successfully carrying out your responsibilities as Trustee.
This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.
Attorney Suzanne Sayward is a partner with the Dedham law firm Samuel, Sayward & Baler LLC and served as the 2009 president of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA). For more information, visit www.ssbllc.com or call (781) 461-1020.