Previously, I wrote on What a Trust is in some detail, but did not go into the duties the Trustee of a Trust owes to the Trust’s beneficiary. To summarize, a Trust is an agreement written by the owner of the property, which gives legal title to the property to the Trustee, but the benefit of the property to one or more beneficiaries. A Grantor is the creator of a Trust, usually the owner of the property placed in the Trust; the Trustee manages the property, the beneficiary receives the income, principal or both. During the Trust’s existence, the Remainderman receives the remainder of the Trust assets when the Trust ends. The Trust Agreement is the written document directing the management of the property, the payments of income and principal, and the scope and duration of the Trust.
Where Do the Duties of the Trustee Come From?
The duties of the Trustee arise from the Trustee’s obligation to carry out the Grantor’s intentions in creating and funding the Trust. There are five general duties of the Trustee – to be prudent, to carry out the terms of the Trust, to be loyal to the Trust, to give the Trust their personal attention and to account to the beneficiaries of the Trust.
Duty to Be Generally Prudent
The Trustee must act reasonably and competently in all matters of the Trust. This is a conduct, not a performance, standard when applied to investments. Therefore, if the Trustee invests the assets in the Trust in a prudent manner but there is a stock market crash, the Trustee is not liable for the loss, but if the Trustee invested all of the assets in cryptocurrencies, the Trustee would be liable for the loss.
Duty to Carry Out Terms of the Trust
The Trustee must carry out the intent of the Grantor as laid out in the Trust document. The Beneficiary’s desires are subordinate to the Grantor’s intent, in effect the Trustee is the Grantor’s agent. This means that if the Grantor restricts access to income or principal otherwise due to the Beneficiary because the Beneficiary has an addiction or a mental health or physical condition that qualified the beneficiary for Medicaid and other state support, the Beneficiary (or the state in the case of Medicaid) can’t force payments from the Trustee.
Duty to Be Loyal to the Trust
The Trustee must have an undivided loyalty to the Trust in all matters that directly or indirectly effect the Trust and its Beneficiary. Loyalty to the Trust must be diligently pursued by the Trustee because self‑benefiting acts by the Trustee are inherently fraudulent, the court can set aside such acts at the Beneficiary’s option. The courts strictly enforce this very high standard when the Trustee acts in a manner that places the Trustee in conflict with the Trust. In effect, the Trustee is personally liable for any loss to the Trust, or gain to the Trustee, arising from transactions in which that Trustee received personal benefit, even if the transactions were otherwise reasonable. Trustee fees, a divided loyalty, are permitted but are limited to those that are “reasonable.”
Because of this Duty of Loyalty, the Trustee may not receive loans from the Trust or hold or own stock in the Trust. If this Trustee is a corporation, buy or sell assets or services to the Trust (either directly or otherwise) including legal, accounting, or consulting fees beyond the Trustee’s usual fee.
Although commercial transactions with the Beneficiary are permitted, there is a presumption that even outside the Trust, the Trustee has undue influence over the Beneficiary. This presumption can be rebutted where the Beneficiary has been fully informed or has been receiving advice from a third party.
Duty to Give Personal Attention
The Trustee may not delegate the administration of the Trust, though the Trustee may hire competent legal, financial, and accounting expertise, but may not delegate the Trust administration or any matters of discretion. The Trustee may engage agents such as stockbrokers, custody agents and real estate brokers and may vote stock by proxy.
The Trustee may engage an asset manager or advisor, provided that the Trustee supervises that manager or advisor and sets an investment policy.
Duty to Account to the Beneficiary
The Trustee must account for his or her conduct in fulfilling the intent of the Grantor as expressed in the Trust. This includes providing timely and complete information in a comprehensible form of the Beneficiary’s interest in the Trust; keeping records and preparing a written accounting of the Trust assets to the Beneficiary; showing the nature, amount, and handling of the Trust assets, along with a written summarization of the receipts of principal, payments from principal, remaining principal on hand, income received, payments of income, and income on hand.
The beginning balance and tax cost basis of assets in the accounts are based on the terms of the Trust. If there is no definition of what method for determining the beginning balance, then the inventory in the Trust under a Will or the value of the assets in the state or federal Estate Tax Returns for a Living Trust. These accountings are made annually, unless otherwise specified for in the Trust.
The Trustee, personally, is liable for any errors or omissions in his or her action while handling the assets in the Trust. The courts may discharge the Trustee from this liability with the appropriate accounting of his or her conduct as Trustee filed for the final term of the Trustee’s tenure.
Specific Duties Arising from General Duties
Within each of the general duties, the Trustee has specific duties to take certain actions in the Trust including to control, segregate, earmark, and protect Trust assets. Based on the Duty of Loyalty to the Trust, mingling Trust assets with other, non-Trust assets is wrong, to make Trust assets productive.
This duty gives rise to the “Prudent Man Rule,” which seeks a middle ground for the Trustee between the interests of the income Beneficiary and the Remainderman: to make the assets productive for the income Beneficiary while being prudent with them for the Remainderman.
The Trustee is also held to a code of confidentiality. The Duty of Loyalty requires that the Trustee tell third parties only what the law requires the Trustee to disclose. Even the child of the Beneficiary, the Remainderman or anyone else who has either an indirect or a contingent interest, cannot direct the Trustee to disclose information concerning the Trust.
The Trustee must also separate income from principal and to determine the right to income, particularly where the income Beneficiary is someone other than the Remainderman. The law of the jurisdiction controls the determination of what is income and what is principal, not other laws such as the Federal Tax Code, which can result in a receipt being income for tax purposes but principal for Trust purposes. In simple receipts and disbursements, allocation is straightforward, but as the nature of the assets grows in complexity, allocation problems grow with it.
The Trustee must also be impartial, unless the Trust requires otherwise, and treat all Beneficiaries equally. Where there is an inequality in the Trust, the Trustee must further the Grantor’s intention, not the Trustee’s personal biases. Additionally, the Trustee must balance the conflicting, equitable interests between the income Beneficiaries and the Remainderman. This impartiality is particularly important and difficult, in the areas of investments and disclosure of information.
Additional Obligations of the Trustee
Governmental regulation requires the Trustee to take additional steps outside of the duties imposed by the Trust, such as tax filings, including income, estate and gift taxes, as well as sales and property taxes, Security and Exchange Commission filings where necessary, banking regulations, when the Trustee is a national bank, and now the recent Corporate Transparency Act.
Conclusion
Whether you are selecting a Trustee or considering accepting the appointment as a Trustee, always be aware of the obligations this imposes on you or the person you appoint, especially if they are not a professional Trustee.
Further References
1. Loring and Rounds A Trustee’s Handbook, 2023 edition
2. Scott and Ascher on Trusts, 5th edition
Read the full article here
