If your estate plan includes the creation of a trust, you will need to give serious consideration to the candidates who can serve as trustee. This role is an important and often demanding job. Not everyone is fit to serve as the administrator to your trust—and even if you place your faith in a worthy trustee, he or she can still make mistakes that have a financial impact on your beneficiaries.
Common Mistakes Trustees Make
The trustee is the person who is responsible for managing and overseeing the trust. This includes keeping accurate records of financial transactions, staying in contact with beneficiaries and their families, and ensuring that the terms of the trust document are followed. While even the most meticulous and well-intentioned of trustees can make mistakes when administering a trust, a little preparation can help prevent simple errors from turning into financial disasters.
Here are some of the most common errors—as well as how trustees can avoid them:
- Failing to understand what is required as trustee. This can happen in one of two ways: the trustee may be unsure what his or her exact responsibilities are or misunderstand what the trust creator wanted due to ambiguous language in the trust. Since trustees can be held personally liable to the beneficiaries for trust mismanagement, it is vital that trustees read through the trust documents carefully to identify the duties of trustees, what is (and is not) permitted, and any potential conflicts that need to be resolved.
- Mismanaging the trust's assets. Trustees not only have an ethical duty to act in the best interests of the beneficiaries, but they also have a legal duty under various federal laws and regulations. These laws allow beneficiaries to seek payment from a trustee for any imprudent investment actions that resulted in financial losses. Trustees can protect themselves by delegating their investment duties to a professional financial planner or investment agent.
- Failing to remain neutral. A trustee is contractually obligated to serve the person who created the trust first, and the beneficiaries second. This may call for diplomacy at times, especially if beneficiaries do not agree with each other (or the trust creator) on one or more provisions of the trust. You may include language in the trust instructions to help your trustee make difficult decisions when placed under pressure by family members. If you are unsure whether your chosen trustee can remain objective, consider naming a corporate trustee with no emotional connection to the beneficiaries or the estate.
- Failing to keep accurate records. A trustee’s fiduciary duty involves a wide range of financial responsibilities, including making payments using trust funds and preparing tax returns for the trust. If a beneficiary files a lawsuit for trust mismanagement, the trustee will have to provide a complete and accurate account for all transactions involving the trust—possibly spanning across several years. Trustees should maintain organized and meticulous records of every decision made related to the trust property and be ready to provide documentation if any disputes arise.
- Overlooking compensation. Acting as a trustee can be a full-time job in some cases, so trustees are entitled to be paid for their services. However, the trustees and beneficiaries may not see eye-to-eye on the appropriate amount of payment. Unfortunately, disputes often arise after the trustee serves for several years without payment, then later requests compensation when the duties related to the trust increase. This problem can be avoided entirely by adding a fee provision into the trust instructions or discussing fees upfront when the trustee is appointed.
Trusts and trustees are becoming involved in legal battles more and more frequently, especially if the documents used in the trust creation have not been reviewed by an experienced estate planning attorney. Whether you have taken on the role of trustee or are still unsure whom to trust with this important obligation, our legal team can help protect your assets for years to come. Contact us today to speak to an attorney about your estate plan.