Your friend or family member has named you as trustee of their trust. What do you do next?
Some people who serve as trustees do what they think they are supposed to do – without a true understanding of the role – or worse, whatever they want to do. In reality, accepting the role of trustee means you become a fiduciary who is obligated to act in the best interest of the trust beneficiaries.
While you technically hold the trust assets in your capacity as trustee, you do not own the assets individually and cannot use them for your own benefit. The money isn’t yours. It is for someone else and you are just holding it for them.
If you mess up, the consequences can be severe. As a fiduciary, you can be personally liable if you act in bad faith or with reckless indifference. Whether or not you have acted in that manner is often a fact for a judge or jury to decide. However, you don’t even want to get to that point. Here are 10 tips for administering a trust to help you steer clear of trouble.
• Find out if you are a current trustee or a future trustee. If you will not become trustee until some point in the future (someone else dies, for example), there may be little or nothing for you to do now.
• Read the trust. This seems obvious but trustees do not always read the trust. It is understandable since legalese can be difficult, but you need to familiarize yourself with the trust and what your duties under the trust are. Identity the beneficiaries. Find out what distributions you are obligated to make and whether you need to provide trust accountings. Be sure to review the trust with your lawyer and ask questions if you do not understand something.
• Assemble your team. This will include a lawyer, accountant and wealth manager if there are financial assets to manage.
• Accept the trusteeship. You will need to sign a short document agreeing to accept the trusteeship. Many people do not do this. A trust is essentially a contract between the person who created the trust and the trustee. When you agree to serve as trustee, you need to sign onto that contract agreeing to be bound by the trust terms. Your lawyer can prepare this for you. Keep the document with the trust records.
• Keep good records. This includes the trust documents, accountings, tax filings, and beneficiary information. Make sure you have all this information organized and easily accessible. I once had a client who had to recreate years of trust accountings, an almost impossible task, and one that left her susceptible to being removed.
• Know when you need professional help. In addition to legal issues and tax filings, you will also likely need help with the trust assets. For instance, if there is real estate, you may need to hire a property manager. If there is a brokerage account, you should hire a respected wealth advisor to manage the trust assets. Don’t feel like you need to go it alone. The trust will pay the fees for these professional services.
• You can get paid. As trustee, you can take a fee for the work you do. However, since it is work, it is taxable income. Sometimes the amount you are to be paid is stated in the trust, but most often it is regulated by state law. Some states have set fees on how much you can receive, and other states base the fees on a reasonableness standard. Your lawyer can help you determine what a reasonable fee is.
• Stay in touch and connected with the beneficiaries. Get to know them and what they need (and don’t need). You should know what is going on in their lives in order to make appropriate distributions to them under the trust terms. And don’t favor one beneficiary over the other. If you cannot be impartial, you should probably not serve as trustee.
• Get releases for trust distributions. When you do make distributions to beneficiaries, make sure you have them sign receipts acknowledging the distribution. If it is the final distribution, the receipt will also include language releasing you from liability. Your lawyer can help you prepare these documents.
• It is okay to say “no.” If you don’t feel like you can take on this major responsibility, you can decline to serve or resign as trustee. Depending on what else is going on in your life, that may be ultimately what is in the best interest of both you and the beneficiaries.