Part 3 of the Serving as a Trustee series
When it comes to selecting trustees, families often choose family members to serve in this role. There are plenty of great reasons to use a family member, and trustee roles can provide useful experience in teaching the next generation to manage wealth. Plus, most people are honored to be asked and willing to serve in order to help the family.
However, if you agree to serve as a trustee, you become a “fiduciary” who must understand all of your fiduciary duties and perform them all. This is vital because even if you do not understand your duties, you can still be held liable for violating them.
What Happens to Trustees Who Breach Their Duties?
Trustees who fail to fulfill their fiduciary duties can be:
- Removed or suspended from office.
- Surcharged (ordered to pay money to the trust).
- Ordered to restore the trust to the position it would have been in had the breach of trust not occurred.
- Ordered to forfeit trustee fees.
- Denied reimbursement from the trust for legal fees and expenses.
In addition, where a trustee has violated fiduciary duties, previous trust transactions could be voided and “unwound.”
Defending Claims is Expensive
If your failure to carry out your duties causes financial harm to a beneficiary, they could file a lawsuit against you to recover the loss. (And don’t think that you won’t be sued because the beneficiary is related to you. Anyone will file a suit if the monetary or emotional stakes are high enough.)
The financial cost of this type of litigation can be high. Spending tens or even hundreds of thousands of dollars defending yourself is easy to do. Also high is the emotional toll of being involved in lawsuits with close relatives. At best, relationships will be tested; at worst, relationships will be ruined.
Protecting Yourself in a Trustee Role
Clearly, the risk of personal liability is high as a trustee, but you could also feel some pressure to take the role and a desire to help your family. The key to avoiding or mitigating any issues as a trustee is proper administration of the trust and good communication with beneficiaries.
If you decide to accept a trustee role, you can protect yourself and your family by:
- Reading the entire trust agreement and understanding the purpose of the trust and the kinds of distributions that are permitted.
- Seeking assistance from an attorney to confirm your understanding of what the trust requires or permits with regard to distributions, investments and beneficiary communications. Although there will be a cost for this legal advice, it is generally an expense that is permitted to be paid from the trust’s assets.
- Appointing a professional trustee (such as a bank) as a co-trustee, when permitted.
- Delegating duties and functions to qualified advisors, including investment advisors and tax return preparers.
- Adopting an investment policy statement and delegating the investment function to a suitable advisor, with regular oversight from the trustee.
- Maintaining good, contemporaneous records of the decisions that were made, what information was considered and the reasons for the decision.
- Preparing regular and meaningful trust accountings that communicate the trust’s activity and information.
- Delivering trust accountings to the appropriate people.
- Obtaining court approval, beneficiary consent or other explicit authorization in advance for any action in a situation where the wording or intent of the trust is unclear, a conflict of interest exists (or may exist) or other risk of liability presents itself.
- Calendaring important dates with respect to the beneficiaries, such as ages at which they become entitled to distributions.
- Calendaring important action dates with respect to trust administration, such as dates for estimated payments, filing tax returns, paying insurance premiums, delivering accountings and making distributions.
- Purchasing a trustee liability policy (a version of an errors and omissions policy), if available.
Deciding To Serve as a Trustee
You should only agree to undertake a trustee role after fully considering your fiduciary responsibilities, the risk and consequences of personal liability, and the family dynamics involved. Resources exist to help you fulfill your duties and reduce your exposure to liability, and you should be willing to take full advantage of these if you agree to become a trustee.
Serving as a trustee can be a great way to help your family. But it is important to understand your role in order to come out of the experience unscathed!
See other relevant blog posts here:
Part 1 - Understanding Your Role as a Trustee for Your Family
Part 2 - Top 4 Mistakes Family Trustees Make