Congratulations! You’ve been named as a Trustee by a loving family member. Now what?
Family members are often named to serve as Trustees without any explanation of their role and duties and sometimes without any notice. It is no surprise that family member Trustees make mistakes, some of which become lawsuits. Here’s an outline of the Trustee’s role and responsibilities and some common mistakes family member Trustees make.
Trustee Role and Responsibilities
Family estate plans often include Trusts because Trusts can accomplish many family goals. Real estate and other assets owned by a Trust avoid probate, the costly, time consuming and public process of carrying out instructions in a Will. Trusts can reduce estate taxes, achieve charitable goals, provide for young children or family members with special needs and accomplish other important purposes for families.
Trustees, the people named in Trusts to manage the affairs of the Trust, have administrative, investment and distribution roles. Trustee administrative roles include keeping records of what the Trust owns and reporting on the condition of Trust assets to the Trust beneficiaries, as well as filing tax returns for the Trust. Trustee investment duties include managing investments directly or choosing and supervising investment advisors. A Trustee’s distribution role is to carry out the instructions in the Trust about what each beneficiary is entitled to receive and when the beneficiary is entitled to receive it.
Common Misunderstandings and Mistakes
Baby boomers are anticipated to transfer close to $70 TRILLION to the next generation. Given the complex nature of Trustee responsibilities, it is no surprise that lawsuits between family members are increasing, often caused by misunderstandings and mistakes by inexperienced family member Trustees. Here are some examples.
Misunderstanding Fiduciary Responsibilities
By law, Trustees have fiduciary level responsibility to beneficiaries of Trusts, not to the creators of Trusts. Fiduciary level responsibility means the Trustee must make decisions based on what is best for the beneficiaries; and, all Trustee conflicts must be disclosed and addressed in a fair way. This can be very tricky when a Trustee is also one of the beneficiaries.
When investments don’t produce enough money to accomplish Trust instructions to provide education or other costs for every one of several beneficiaries, carrying out fiduciary responsibility can challenge even experienced professional Trustees. And, another challenging situation occurs when investments produce much more money than was expected and potentially put a great deal of money in the hands of very young persons.
Investment Supervision Misunderstandings
Trusts can own life insurance, real estate, stocks, bonds, mutual funds and virtually any other assets. Trustees have a duty to supervise the performance of all investments, not simply be a record keeper and that requires knowledge and experience. For example, life insurance policies owned by Trusts, especially policies with cash value, should be reviewed annually, with updated performance information obtained from the insurance company. Stock, bonds and similar investments need even more frequent attention from Trustees. Trustees must be able to carefully select investment advisors as well as supervise the advisors and be well informed about laws and Trust instructions that guide or limit Trust investments.
Record keeping and taxation of Trust owned property and investments are very different than the same tasks for individually owned assets. For example, Trust income reaches the highest tax bracket (37%) for income over $ 12,950 compared with an individual taxpayer’s income that reaches the 37% bracket at $ 500,000. When Trust income is distributed to individual beneficiaries, the income is instead taxable at the individual’s rate.
Payment of premium for Trust owned life insurance involves more than sending a check to an insurance company. The payments are usually funded by gifts to the Trust that have to be documented in a particular way and a mistake can void the tax benefit of the Trust.
When Trustees don’t provide periodic accountings to beneficiaries, the result can be more than hurt feelings of other family members. The same is true when Trustees pay themselves fees for their work as Trustees, depending on whether fees are authorized by the Trust and whether the fees are reasonable in relation to the work.
Approaches to Avoiding Trustee Misunderstandings
Future misunderstandings between family member Trustees and beneficiaries are not easily foreseen. Changes in families through marriage, divorce or unexpected financial reverses or gains can upend even the most stable, close family relationships.
People who intend to name family members as Trustees, can help avoid future misunderstandings by a range of methods. A family member’s interest and willingness to learn about Trustee roles and duties may be an important clue to whether being a Trustee is a good fit for that person. Written materials about Trustee roles and duties are not hard to find and the family’s current legal, tax and financial advisors are another source of education. Selecting a professional Trustee is another choice some families may prefer. Consulting the family estate planning attorney and other close professional advisors is a good place to start in searching for good choices for Trustees.
Samuel Financial LLC is located at 858 Washington St. Dedham, MA 02026 and can be reached at (781) 461-6886. Securities and advisory services offered through Commonwealth Financial Network ®, member FINRA/SIPC, a registered investment adviser. www.samuelfinancial.com.
Legal services offered through Samuel, Sayward & Baler, LLC are separate and unrelated to Commonwealth.