Last week I discussed potential issues for people who act as an executor of the estate of a deceased family member or friend. Whereas an executor’s role may last six to twenty-four months, trustees often have the job for decades. It can be a mammoth responsibility requiring many hours of dedicated service as well as accounting and legal requirements. Before you say, “Yes, I’d be honored to serve”, make sure you fully understand what you are agreeing to do.
Read and understand the trust document. As a trustee, you are a fiduciary and therefore liable for your actions. Ignorance is never an accepted excuse for mismanagement. Be sure and read the trust document before you agree to act as a trustee. If there are items that you do not understand, ask for clarification in writing. Trust documents typically call for the trustee to make many decisions of judgment. For example, the trust may allow the trustee to disperse money to a beneficiary “to maintain his or her accustomed lifestyle”. You have to decide what is appropriate in a given situation. Do you buy them the BMW they want or would a Ford be more reasonable?
Meet with the beneficiaries periodically. You will need to spend time with the beneficiaries to understand their needs. Some beneficiaries can be quite difficult and you must be emotionally prepared to deal with confrontational situations. Your best solution to maintaining good relations with beneficiaries is good, ongoing communication. Remember, people hate surprises.
Record keeping. You’ll need to maintain detailed records of all of your actions because you may have to go to court and prove everything you’ve done. A trust is considered a separate tax entity and therefore you must file a separate tax return every year.
Manage the money. I strongly recommend that you develop a written Investment Policy Statement (IPS) based on the investment powers outlined in the trust document. As a trustee, the standard of care that you are held to falls under the ‘prudent expert’ rule, meaning that your investment decisions are subject to a high level of scrutiny.
Most trust agreements allow you to hire professional help, including an accountant to do the annual tax return, an attorney to assist you with legal matters, including interpreting the trust document, and investment advisors to help manage the money. Even if you hire professionals to do much of the work, you continue to remain responsible for everything related to the trust.
If you are asked to act as trustee by a friend or family member, you may find you are being asked to serve without compensation. In some cases this is appropriate but you should consider this carefully. Often, your role as trustee will last for many years and it will take a great deal of time and work to do the job well. Decide whether you are willing to do this work for free.
Acting as a trustee can be a very rewarding experience. It gives you the opportunity to be involved, in a positive way, in the lives of people you care about. At the same time, it is a tremendous responsibility and one that you should consider carefully before you accept.