A Close Look At a Trustee’s Duties

A Close Look At a Trustee’s Duties – Julius Caesar’s wife was not a trustee, but she was (rather unfairly) expected to act like one. When she rebuffed a man who had tried to seduce her, Caesar divorced her anyway on the grounds that she must never even be suspected of unseemly behavior: “Caesar’s wife must be beyond suspicion.”

The highest ethical standards are required for all types of trustees, whether they are dealing with personal assets or business interests. In all cases, the golden rule is that a trustee should put the beneficiary’s or client’s interest first.

Important guiding principles

The first and foremost duty is that of loyalty. A trustee must always act unswervingly in the interest of the beneficiaries, which means undertaking nothing for the trustee’s own personal gain or in conflict with the beneficiaries’ stakes. By a similar token, the trustee’s family, attorneys, accountants and other associates are equally forbidden from reaping any advantage. If trustees are in any doubt about gray areas, their best course would be to obtain a court’s or beneficiaries’ approval and consent.

At the root of trustees’ responsibilities is the overarching mandate to carry out directions spelled out in the trust itself. That requires a clear understanding of all the basic terms referenced in the trust. Trustees cannot offload or delegate any duties that call on their own skill and judgment, but they can certainly hire experts who may be well placed to evaluate suitable investments. Or they may need to engage lawyers. They will do whatever is necessary to protect the trust property and defend it against any challenges.

The cardinal rule for trustees to keep front of mind is that the assets do not belong to them. They are charged with safeguarding and protecting them wisely for the sake of the beneficiaries. Therefore, they must never mingle the trust assets with their own property, which entails maintaining separate checking, banking and investment accounts. Trustees should start by knowing exactly who all the beneficiaries are and how to contact them as needed.

Behavior is strictly regulated. Trustees must take care not to give preference to any particular beneficiary and must make every effort to invest the trust assets prudently and safely. That may be a balancing act. It does not necessarily require keeping everything in a noninterest-bearing account, but at least it contemplates that the assets achieve some modest growth in the context of minimal risk. The aim should be for the trust principal to preserve its purchasing power over time while juggling inflation and costs and defending against any challenges.

A day in the life

Trustees undertake a range of duties tied to the fulfillment of the trust instructions. Some typical tasks include:

• Making decisions regarding beneficiaries’ payments, such as extra discretionary payments that may be needed.
• Keeping track of records.
• Preparing tax forms, filing them and coordinating with the IRS.
• Selecting distribution strategies to minimize taxes.
• Communicating with beneficiaries and answering their questions.
• Sharing statements and reports with beneficiaries.
• Notifying the family, co-trustees, banks and brokerages of significant events.
• Arranging appraisals of the assets.

Personal liability for behaving badly

Trustees are entrusted at the highest level of integrity, so courts will be adamant about holding their feet to the fire. Since the trustees can be personally liable for shortcomings, they have every incentive to behave impeccably.

They may be penalized for failing to act in the interest of the beneficiaries or not following an objective standard of care. Beneficiaries can file a lawsuit against them for any negligent or intentional conduct constituting an abuse of trust, including favoritism, commingling assets, or accepting a bribe or kickback. A judge may remove or replace a trustee or reduce the trustee’s fee. In serious instances, trustees may end up responsible for paying financial damages out of their own pockets depending on the extent of the harm.

The best method to avoid embarrassment and punishment is to follow the trust instructions scrupulously and to keep excellent, organized records. An attorney can help guide both trustees and beneficiaries in interpreting and managing trust documents.

Copyright, 2023

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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