Were you recently informed that a family member or close friend named you as the Trustee of a trust? If so, and this is the first time you have served in the role of Trustee, you may be understandably concerned about fulfilling your duties and responsibilities as Trustee without making a costly mistake. Although there are a seemingly endless number of errors that a Trustee can commit, there are also some common pitfalls you should try to avoid during trust administration. Knowing what those are ahead of time will help you to avoid making those common mistakes.
Trust Basics – The Role of Trustee
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Tustor, who transfers property to a Trustee. The Trustee holds that property for the trust's beneficiaries. A testamentary trust is one that activates upon the death of the Trustor via a provision in the Trustor's Last Will and Testament in most cases. A living trust activates as soon as all formalities of creation are in place. The overall job of a Trustee is to administer the trust and manage the trust assets. Specifically, however, the duties and responsibilities of a Trustee are numerous and may include:
- Managing and protecting trust assets
- Abiding by the trust terms unless they are impossible, illegal, or unconscionable
- Investing trust funds using the “Prudent Investor Standard”
- Monitoring trust investments
- Communicating with trust beneficiaries
- Resolving conflicts among beneficiaries
- Making discretionary decisions
- Distributing trust funds to beneficiaries
- Approving or denying distributions if given discretionary authority
- Keeping detailed trust records
- Preparing and paying trust taxes
Trust Administration Pitfalls
Administering a trust is often a complex and complicated endeavor that frequently requires both legal and financial knowledge and experience. Some of the most common pitfalls every Trustee should be aware of in an effort to avoid include:
- Misunderstanding a trust term. Read through the entire trust agreement several times until you are sure you understand every provision. If anything is vague or confusing, make a note to ask the trust attorney immediately. Ignorance is not an acceptable excuse if you make a mistake as Trustee and in some cases, you could be held personally responsible for an error.
- Failing to consult a trust administration attorney. As Trustee, you will likely have numerous legal questions and concerns. It is not a role you should take on without a legal professional to provide you with advice and guidance.
- Not understanding and/or using the “prudent investor standard.” When you invest assets owned by a trust, you must do so using the “prudent investor standard” which essentially means you must avoid risk, guard the trust principal, and be more careful with the assets and income than you would be with your own assets and income.
- Forgetting about future beneficiaries. If the trust has both current and future beneficiaries, all decisions you make must consider the best interest of both classes of beneficiaries.
- Failing to honor the trust purpose. It is very difficult to set aside your own opinions; however, as the Trustee, everything you do must further the Trustor's intended purpose and must abide by the trust terms unless a term is illegal or unconscionable.
- Creating a conflict of interest. If the Trustor was a family member or friend, there is a good chance you know at least one beneficiary. This can create a conflict of interest if you allow it. Make sure that any personal relationship you have with, or knowledge of, a beneficiary does not in any way interfere with your duties as Trustee.
- Tax errors. A trust is a separate legal entity. Therefore, a trust must file a trust tax return each year. If any taxes are due, they must also be paid in a timely manner. To ensure the tax returns are prepared correctly and any tax due has been calculated accurately it is best to hire a certified public accountant (C.P.A.) to help you and to help you keep the detailed financial records required as Trustee as well.
Contact a Trust Administration Attorney
For more information. If you have additional questions or concerns about trust administration, contact an experienced Phoenix trust administration attorney at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.