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Tuesday, July 26, 2016

Things to Do Following the Death of a Loved One: Part III

Links to Part I and Part II of this Series.

The following outlines some of the legal duties associated with serving as Trustee of your loved one's trust.

"I've Been Named as Trustee... Now What?!"

  • In our experience, most persons named as a trustee are non-professional trustees.  In other words, the role of trustee is typically filled by a family member, either a spouse or a child, or a trusted friend.  As a non-professional trustee, most persons nominated have very little idea of what is expected of them or the liability they take on by agreeing to act as trustee.  We’ve prepared this article to assist you in understanding the duties and responsibility you took on when you agreed to act as trustee, if you’re currently serving, or will take on, if you’re not yet serving but have been nominated to serve.

     

  • It is critically important for you to understand these duties because a failure to carry out each and every duty with 100% accuracy with the terms of the trust could cause you to be personally liable for any damages caused by your failure.  It is our experience that trustees who take on these responsibilities with the belief that they are going to be sued will be more attentive to properly carrying out their duties and will therefore be better able to withstand a charge of a failure to carry our their duties.

     

  • This list of duties is not meant to be exhaustive.[1]  If you have any questions or do not understand any aspect of these duties, you should ask to meet with a lawyer discuss your questions.  You will likely be best served by consulting with a lawyer whose practice is focused primarily in the area of trust planning, licensed in the state where the Grantor passed away (or where the trust was formed/owned a majority of property).  Most importantly, when you are unsure of the appropriateness of any action you intend to take, you should consult with an attorney.

     

  • In the absence of express language of the trust stating otherwise, these are your duties, Ms. or Mr. Trustee:

     

  • Duty to Administer the Trust.  Upon acceptance of the trust, you are under a duty to the beneficiaries to administer the trust.  The law requires that you provide detailed notice to each beneficiary.  Simply because you’ve been nominated does not mean you have to serve as trustee.  If you choose not to serve, a written, preferably notarized, notice of such intent to not serve should be given to the beneficiaries.  Once accepted, however, you accept responsibility for administering the trust.  This duty to administer applies even though you do not receive compensation for your services, whether voluntarily or under the terms of the trust.

     

  • Duty of Loyalty.  If you agree to act as trustee, you are under a duty to the beneficiaries to administer the trust solely in the interests of the beneficiaries.  The fundamental principal of a trustee is that you’ve been entrusted with someone else’s property for which you are accountable.  It makes sense then that you cannot act in any manner that will benefit yourself to the detriment of the beneficiaries.  Additionally, you are not permitted to purchase trust property, even if you pay a fair price and even if the purchase is via a public auction.  It is immaterial if you act in good faith.  You are also not permitted to sell your own individual assets to the trust.

     

  • Duty Not to Delegate.  You are under a duty not to delegate work to others which you can reasonably be required to personally perform.  The rationale is that you were selected as trustee because of your identity or your specific capabilities.

     

  • Duty to Keep and Render (give) Accounts.  The law requires that you provide detailed accounting annually to each beneficiary.  This duty is typically where most trustees fail.  A fundamental responsibility of a trustee is to render (give) clear and accurate accounts for the assets which have been entrusted to you.  You absolutely cannot refuse if a beneficiary demands that you account for every single penny of trust assets.  In most instances, you will want to periodically account to the beneficiaries because it evidences to the beneficiaries that you are not concealing anything thereby decreasing the chances that a beneficiary will feel the need to sue just to get information, and because it is much easier to account for short time period than for a much longer one, such as when a beneficiary asks for an accounting after the passage of several years potentially.  It should go without saying that receipts of all trust expenses should be kept.

     

  • Duty to Furnish Information.  You have a duty to the beneficiaries to provide upon request at reasonable times complete and accurate information pertaining to the trust, and to permit the beneficiary or a person duly authorized by the beneficiary to inspect the trusts books, ledgers, property, or any other documents relating to the trust.  This duty to provide information would also include the duty to provide a copy of the trust document itself.  In the absence of such information, a beneficiary would have no real way to either determine his rights under the trust or to enforce those rights. The law requires that you provide details in a notice to each beneficiary. 

     

  • Duty to Exercise Reasonable Care and Skill.  You are under a duty to care for the trust property as would a man of ordinary prudence when dealing with his own property.  That is not to say that you should treat the trust property as you would your own property.  You may still be held liable for a loss caused by failing to provide use the care and skill of a man of ordinary prudence even though you may have exercised all the care and skill of which you were capable.  On the other hand, if you have a greater degree of skill than that of an ordinary man, you are liable for a loss resulting from your failure to use such skill.  The test for determining whether you acted prudently is based upon the circumstances as they reasonably appeared at the time a decision was made and not at some subsequent time when other parties have the benefit of hindsight.  And not surprisingly, ignorance of the terms of the trust is not a defense to liability.

     

  • Duty to Take and Keep Control.  You are under a duty to the beneficiaries to take reasonable steps to take and keep control of the trust property.  This area is perhaps the most difficult to properly administer and is by far the source of most trust disputes.  If personal property such as cars, jewelry, and other personal items are part of the trust property, you are under a duty to take and keep possession of those items, and to maintain those items.  Beneficiaries are not entitled to possession or control of any item except as provided in the trust.  You should take and keep exclusive control of all trust property unless it is reasonable to entrust possession to an attorney, broker, banker, of other agent.

     

  • Duty to Preserve Trust Property.  You are under a duty to use reasonable care and skill to preserve the trust property.  You should not carelessly allow trust property to be lost or stolen, and where appropriate, insurance should be maintained.

     

  • Duty to Enforce Claims.  You are under a duty to the beneficiaries to take reasonable steps to realize on claims which you hold in trust.  In other words, if you in your capacity as trustee have a valid claim against another person, whether arising out of contract or tort, you must pursue the claim.  If, however, it reasonably appears that a claim cannot be collected in full, or where it is doubtful that the claim is enforceable, you can properly enter into a settlement agreement.

     

  • Duty to Defend Actions.  You have a duty to defend actions which may result in a loss to the trust estate, unless under the circumstances it is reasonable not to make such defense.  For example, if a claim is made against you as the trustee and you lose, you have an obligation to appeal to a higher court if under all the circumstances it is reasonable to do so.  You may also pay a claim, even though the claim does not appear to be enforceable, if the costs and risk incurred in defending the claim would be such that it is not reasonable to contest the claim.

     

  • Duty to Keep Trust Property Separate.  In the same thread as keeping accurate accounts of the administration, you also should not commingle trust property with your own property nor with any other non-trust property. 

     

  • Duty to Make Trust Property Productive.  You have a duty to use reasonable care and skill to make the trust property productive.  If the trust owns land, you are normally under an obligation to lease it or to manage it so that it will produce income.  You are not required to make real estate productive if the trust provides that the property is to be distributed to another party, if the trust provides otherwise, or if the land is undeveloped and cannot be leased or otherwise made productive without making improvements which you are not empowered to make.  Furthermore, you have a duty to invest trust funds so that the funds will produce an income.

     

  • Duty to Pay Income to Beneficiary.  When a trust is created to pay income to a beneficiary for a stated period, you are under a duty to the beneficiary to pay to him at reasonable intervals the net income of the trust property.  You may withhold a reasonable amount to meet present or anticipated expenses which are properly chargeable to income.  If, however, the trust provides that you have discretion to withhold income, you have no duty to pay it to the beneficiary.

     

  • Duty to Deal Impartially with the Beneficiaries.  When there are two or more beneficiaries of a trust, you have a duty to deal impartially with them.  You cannot act in a manner that is designed to benefit one beneficiary to the detriment of another.  This rule is particularly applicable in instances were you, the trustee, are also a beneficiary.

     

  • Duty with Respect to Co-Trustees.  If there are several trustees, each is under a duty to the beneficiaries to participate in the administration of the trust and to use reasonable care to prevent a co-trustee from committing a breach of trust or to make a co-trustee to fix a breach of trust.  It is ordinarily a breach of trust for one co-trustee to allow another co-trustee to have such control of the trust property as to enable him to misappropriate it.  Accordingly, trust property should be registered in the name of all trustees and if one co-trustee has reason to suspect that another co-trustee is committing or attempting to commit a breach, he must take reasonable steps to prevent him from doing so.  If you are one of several trustees and you do not agree with a decision that is made by the other trustees, there is typically a process through which you can evidence your disagreement and be free of any fear of liability for the action taken.

     

    If you are found to have breached any of these duties (which is also sometimes referred to as a “breach of trust”), a beneficiary can file a lawsuit seeking:

  • To Make You to Perform Your Duties.  This is nothing more than asking a court to make you do what you were supposed to have done in the first place.

  • To Enjoin You from Committing a Breach of Trust.  If it was known that you were about to breach one of your duties, a beneficiary can ask a court to order that you not do so.

  • To Make You to Fix a Breach of Trust.In other words, if it is shown that you have breached one of your duties, to take corrective action which would potentially include making the trust whole for any damages suffered.  If you commit a breach of trust, you are chargeable with:

    • Any loss or depreciation in value of trust property resulting from the breach of trust;
    • Any profit made by you through a breach of trust;
    • Any profit which would have accrued to the trust if there had been no breach; and
    • Any interest imposed either by statute or by a court in its discretion

 

  • To Remove You as Trustee.  Before you can be removed as trustee, there must be shown to have been a breach of your duties. 

 

And then there are a few additional items of which you need to be aware:

  • Accountability for Profits in the Absence of a Breach of Trust.  You are accountable for any profit made by you, even if the profit does not result from a breach of trust.  If you enter into a transaction intending to make a profit and there is no breach of trust, you nevertheless may not retain the profit for yourself.
  • No Liability for Loss in the Absence of a Breach of Trust.  You are not liable to the beneficiaries for a loss or depreciation in value of trust property, or for a failure to make a profit, if the loss or failure to make a profit did not result from a breach of trust.

Again, this general list of duties is not meant to be exhaustive, and may not apply to everyone/every situation/every trust.  If you have any questions or do not understand any aspect of these duties, or for specific information related to the estate you’re administering, please seek advice specific to your situation from an estate planning attorney.

Feel free to reach out with questions and to schedule a consultation.

-Tiffany Ballenger Floyd, Esq., Phillips Ballenger PLLC

[1] Most of the duties listed are found in the Restatement of the Law, Trusts (Second Edition).


 


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