Volume 13 Issue 6 -- November/December 2009
Volume 13 Issue 6 -- November/December 2009
In the last issue we looked at the basic duty of a Trustee — to administer the Trust impartially. In this issue we will look at some other aspects of being a Trustee.
The duty of impartiality extends not just to distributing Trust assets. It also relates to investing the Trust’s property.
Consider this example. 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 may say that during Borg’s life, all of the income from the Trust will be paid to Borg, and at Borg’s death all of the Trust assets shall go to Bertha’s children, Boris and Betty.
Borg, however, acquired a taste for an expensive lifestyle and wants as much income as the Trust assets can generate so he asks the Trustee to invest the Trust assets in high-yielding, but very risky investments. What do you the Trustee do?
If you follow Borg’s suggestion, you will satisfy Borg’s desire for income but at the same time place the Trust assets (often called “principal”) at risk, creating the chance that not much will be left for Bertha’s children, Boris and Betty.
On the other hand, you could invest all of the Trust assets in ultraconservative investments that produce little income but assure that the maximum amount will be available later for Boris and Betty. But that will mean little income for Borg.
The Trust instrument may provide some guidance on how to resolve this question, but often it will not address the situation. If all of the beneficiaries can agree in writing on a course of action or distribution, a Trustee can usually rely on that.
Where there is no agreement, the Trustee must decide, and because the Trustee must be impartial, the Trustee must balance the desires of both sets of beneficiaries to produce reasonable income with reasonable risk to the principal.
Whatever your decision, you should document the decision and then inform the beneficiaries.
It goes without saying that a Trustee who is also a beneficiary of the Trust cannot favor herself over the other beneficiaries.
Apart from the obligation to administer the Trust impartially, the Trustee must also invest the Trust assets according to what is called the “Prudent Investor Rule.”
This means, typically, that a Trustee must invest the Trust assets in a manner that is consistent with a reasonably prudent investor. If an advisor like Bernie Madoff promises 20% returns per year, every year, it may not be prudent to believe such statements. If a Trustee invests in speculative ventures, like buffalo polo, and loses Trust assets, the other beneficiaries of the Trust may be able successfully to sue the Trustee for the loss.
On the other hand, a Trustee might be too conservative by investing in very safe assets that produce little or no income. Particularly if there are Trust beneficiaries who are dependent upon the Trust’s income, they may complain loudly.
In some cases, a Trustee may wish to hire professionals — attorneys, accountants, or investment advisors, to assist in this endeavor. A Trustee has authority to pay from Trust funds professionals’ reasonable fees for their services.
A Trustee is strictly accountable for the Trust’s assets. This means, among other things, that a Trustee must be careful about co-mingling their personal assets with those of the Trust. In some situations fiduciaries co-mingle personal assets such as bank accounts with the funds of the trust.
To prevent such co-mingling, a Trustee should always use a separate bank account for the Trust in the Trust’s name and EIN. Also the Trustee must be sure that all deposits and withdrawals are reflected in the bank statements of the Trust’s account. A Trustee must also make sure when acquiring assets or investments that any new property is properly titled in the name of the Trust.
In the next issue, we will consider some of the tax aspects of Trusts. If you have questions about Trusts or about being a Trustee, call Newland & Associates.
Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.
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.
Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.
Return to Newsletter List
Return to Content Index