Serving as a Trustee - Part Four: Trustee Liability
It is very important for you, as the Trustee, to be familiar with the provisions of the Trustor’s estate planning documents. The trust gives you certain powers as Trustee. You also have powers conferred under California and Federal law. An attorney can help familiarize you with your powers and possible limits on your powers. You need to be aware of potential pitfalls that could make you personally liable for any resulting harm.
DUTIES TO BENEFICIARIES
A primary concern is the duty you owe to the beneficiaries. As noted in Part III of this series, the Trustee must remain impartial as between all beneficiaries, including between the income and the principal beneficiaries. Doing business with one of the beneficiaries is usually prohibited. A Trustee must keep all the beneficiaries reasonably informed about the trust and the administration of the trust. Also, you must provide a beneficiary with information requested, including a copy of the trust.
As between yourself and the trust, you have a duty to avoid conflicts of interest and not to engage in self-dealing. An example of what not to do would be to use trust money to invest in your own personal start-up company. These and other acts of misconduct are called “breaches of trust” and can result in your personal liability for any harm done as well as your removal as Trustee. Other acts of misconduct include allowing an insurance policy to lapse and inadequately securing personal property. You also have a duty to employ any special skills you may have (i.e., as investment advisor, attorney, accountant, real estate broker, etc.).
As trustee, you must conduct yourself as a “Prudent Person” and as a “Prudent Investor” would. Among the actions taken by Prudent Persons and Prudent Investors are preserving the trust assets, making them productive, and reviewing your investment strategy on a regular basis. Of course, all such duties are subject to the terms of the trust instrument itself. Fortunately, you may enlist the help of financial planners and other advisors in satisfying your financial duties. However, keep in mind that, generally, you will remain personally responsible for the actions taken by the trust advisors you hire, and you must make all final decisions.
As Trustee, you must spend adequate time administering the trust and its assets. Annual tax filings, with related documents, accountings, and regular monitoring of investments, are necessary to manage and preserve the assets. A Trustee who fails to manage and monitor a trust adequately is subject to being removed by a Court and may be liable for any damages resulting from such lack of attention to trust matters. Fortunately, most trusts permit the Trustee to hire others to assist with these tasks.
When dealing with advisors like accountants, financial advisors and attorneys, make sure that each individual knows the scope of his/her duties. Putting the assigned responsibilities in writing, even in a simple letter, will go a long way toward avoiding confusion and missed deadlines. For example, you do not want your CPA and your attorney each thinking that the other was responsible for filing a tax return with the result that it does not get filed.
Oftentimes, the trust provides for two or more Co-Trustees to serve. If this is the case, all decisions must be made unanimously, unless the trust directs otherwise.
Trustee liability can be a serious issue for a trustee. Being sure to understand your duties, devote adequate time, and ask for help from advisors can go a long way toward avoiding costly mistakes.
The above information may be helpful when serving as a Trustee. It is designed merely to serve as a guide to those dealing with the administration of a Trust and is not intended to be all-inclusive or to provide legal advice of any sort.