Volume 13 Issue 5 -- September/October 2009
Volume 13 Issue 5 -- September/October 2009
Suppose a friend or relative who greatly values your judgment appoints you Trustee of a Trust that he has created. While you should be honored that your friend or relative thinks so highly of you, you also need to be aware of what you’ve gotten yourself into.
What does it mean to be a Trustee, anyway?
In simplest terms, a Trustee’s duty is to carry out the terms of a “Trust.” There are many types of Trusts, but the two most common are Revocable Living Trusts (RLTs) and Testamentary Trusts. “Revocable” means changeable or revocable, and “Living” implies created during life as opposed to at death. Testamentary Trusts by contrast come into existence only after the death of the creator because the Trust is created through a Will. Our website contains an article entitled “Plain English Explanation of Wills & Trusts” that provides additional background about Wills and Trusts.
Trusts are usually, and in some cases must be, written in sometimes lengthy documents called “Trust Instruments.” The Trust Instrument can be thought of as a set of instructions to guide the Trustee in carrying out the wishes of the Trust creator.
All Trusts have three parts: (1) a Grantor or creator of the Trust; (2) a Trustee; and (3) Beneficiaries.
Trusts typically acquire or own assets through one of two ways. Either they are directly transferred to the Trust by the Grantor or they are “poured over” into the Trust as a result of the Grantor’s Will.
The principal duty of a Trustee is to follow the guidelines of the Trust Instrument while preserving the Trust’s assets and to make sound decisions about distributing Trust funds consistent with the wishes of the Grantor.
This statement may make the job of a Trustee seem deceptively simple. A Trust can last for many years, may involve complex assets, and the Trustee may be faced with warring beneficiaries. A well written Trust Instrument may make the Trustee’s job easier, while a poorly written Trust Instrument can make the Trustee’s job much more difficult.
In legal terms, a Trustee is a “fiduciary,” meaning that the Trustee must always act in the best interests of the Trust and its beneficiaries. In the remainder of this newsletter and in a subsequent issue, we will look at some of the basic aspects of the Trustee’s role.
One of the key duties of a Trustee is the duty of impartiality. The Trustee cannot favor one beneficiary at the expense of others. Sometimes, this will be easy, such as when all beneficiaries have the same interests. The beneficiaries, however, may have differing and conflicting interests.
Suppose Bertha creates a Trust and names you, her trusted friend, as Trustee. The Trust provides lifetime benefits for Bertha’s second husband Borg, who was much younger than Bertha, and then the remainder goes to Bertha’s beloved children from her first marriage, after Borg’s death. Bertha’s children and Borg, not surprisingly, do not get along.
The Trust Instrument says that the Trustee may make discretionary distributions of Trust principal (the underlying Trust assets) to Borg to maintain his lifestyle, but Borg has acquired a taste for an expensive lifestyle and wants as much money from the Trust as possible. Bertha’s children, Boris and Betty, however, believe that Borg is a spendthrift and is wasting their Mother’s hard earned money. What do you, the Trustee, do?
To maintain Borg’s costly lifestyle will almost certainly reduce, if not deplete, the amount available for Bertha’s children, after Borg’s death. But what if Borg’s need for funds was the result of a medical condition that required very expensive treatments, and the Trust assets are limited?
You, the Trustee, have a dilemma. The Trust instrument may provide some guidance as to how to make discretionary distributions, but more likely it will not resolve this problem.
Because the Trustee must be impartial, the Trustee must balance the desires of both sets of beneficiaries. The Trustee cannot unfairly favor Borg over Boris and Betty, or Boris and Betty over Borg. In some situations, there is no easy answer, and whatever you as Trustee do will make someone unhappy.
In the next issue we will look at some other aspects of being a Trustee. In
the meantime, if you have any questions about Trusts or Trustees, please contact
us. For information on the benefits
of having a Trust, you may wish to read Newland’s
Business Notes, September/October 2001.
Published by the law firm of Newland & Associates, PLC
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While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
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