There is a saying that the two best days in a boat owner’s life are the day he buys his boat and the day he sells it. A similar notion applies to being a director – it’s an honor to be appointed, then a huge relief when you stop being a director. This is because it is difficult to be a trustee. This requires knowledge of a wide range of topics, including:
- Fiduciary Duties of Trustee. These include the duties of loyalty, impartiality, prudence (often referred to as duty of care), protection of fiduciary assets and enforcement of claims, and the duty to inform and account to beneficiaries, among others. . Violation of these obligations engages the liability of the trustee.
- Understand the terms of the trust, including the specifics of the distribution terms and their legal meaning.
- Investments, as well as the ability to hire and supervise appropriate investment managers.
- Administrative matters such as record keeping and accounting of principal and income.
- Estate planning, trusts and the basics of estates, gifts and GST.
- Income tax, including how trusts are taxed at the federal and state levels.
In addition, the fiduciary must be adept at communicating productively and working with beneficiaries about their financial life and distribution needs (an area that can be fraught with pitfalls).
It’s a daunting list. I’ve met lawyers, accountants and financial advisers who thought they were well prepared to serve as trustees given what they do for a living, but only realized the true scale of the business. ‘after being a fiduciary.
Fiduciary Best Practices
Being a trustee is tough, but adopting the four best practices below employed by professional trustees will go a long way to ensuring you do a good job and mitigating your liability.
1. Build a team
No one can be fit to be an effective fiduciary. Our firm is a trust company, but we are always looking for outside help and advice on all kinds of issues. If your day-to-day job isn’t to be a fiduciary, building a team of senior advisors is essential. Of course, as the trustee, the responsibility rests with you, so a great way to think about it is that the trustee will be the CEO of the trust, and the advisors are the trustee’s direct reports providing expertise and advice.
Who should be on your team?
- Above all, a lawyer specializing in trusts. Usually this is an estate planning lawyer. Sometimes, however, the advice of a trust and estates lawyer is necessary.
- Second, a tax accountant knowledgeable about trust taxation.
- Next, unless the trustee has investment expertise, an investment advisor should be part of the team. A word of warning – check the standard of care under which the investment adviser operates. A “registered investment adviser” and those in banks and trust companies are fiduciaries and must act in the best interests of their clients, which is like the norm for fiduciaries. In contrast, a broker-dealer’s advisors simply need to recommend suitable investments (but which may not be in the best interests of their clients). This discrepancy between a broker’s standard of care and the fiduciary’s fiduciary duties may expose the fiduciary to liability.
- If the investment advisor works at a bank or trust company, they may be able to provide additional support with the administration of the trust.
A good practice is for the trustee to have regular meetings with the team of advisers, both as a team and individually. In addition, the trustee should not hesitate to pick up the phone and seek advice. In our practice, we constantly remind ourselves “you don’t know what you don’t know”, so it is best to err on the side of seeking specialist advice. The distribution of tasks must be clear; each member of the team should clearly understand their responsibilities.
2. Understand the key terms of trust
Knowing what the trust document says and what key terms mean are fundamental duties of trustees. (Can you imagine a beneficiary suing a trustee and his defense being “I didn’t understand what the trust document said.”)
Once you become a trustee, a best practice is to: (a) read the entire trust document and (b) go through the document with an attorney and ask them to explain key terms. Important terms to understand include (a) distribution standards, (b) and special provisions relating to investment – in particular the instruction to sell or not to sell certain assets, (c) provisions on which the trustee must act, such as the power to appoint a successor, and (d) whether the age of the beneficiary will trigger distributions or any other action.
3. Work productively with beneficiaries
Dealing with beneficiaries is often the most difficult aspect of being a trustee. Differences of opinion on distribution amounts, investment strategy or other matters relating to the management of the trust may lead to disagreements.
To mitigate potential issues with beneficiaries and facilitate a productive relationship, trustees should:
- Communication and transparency. Most problems with beneficiaries can be avoided through frequent and transparent communication. Having regular meetings (2-4 meetings per year), providing account statements, investment reports, annual accounts and periodic phone calls are all best practices.
- Beneficiary Education. Education about trust at the start of a fiduciary-beneficiary relationship is a great way to manage expectations. The trustee and members of the advisory team must inform the beneficiary of the settlor’s intention on the important aspects of the trust as well as the main terms of the trust, in particular the distribution standards.
- Distribution Clarity. The trustee must understand the beneficiary’s financial situation and distribution needs. A good way to do this is to help the beneficiary create a budget and determine what regular distributions are appropriate given the amount of trust assets and distribution terms. Discussing cash flow and potential upcoming special distribution needs at regular meetings will avoid surprises. Within our company, we generally believe it is best to provide a regular monthly distribution, followed by special distributions as required.
- Provide the required information. One of the main duties of the trustee is to keep the beneficiaries of the trust reasonably informed, including the nature of the assets, the fees and expenses paid (including the remuneration of the trustee) and the amount of the distributions. In order to limit its liability, the trustee must provide this information to the beneficiaries. Most states have a law detailing the information a trustee must provide to beneficiaries.
4. Documentation is crucial.
A familiar saying goes that the three most important rules of real estate are “location, location, location”. Similarly, the three most important rules of guardianship are “documentation, documentation, documentation”. Although trustees cannot guarantee perfect results, they must act with care, skill and impartiality. Trustees must have rational grounds for their decisions. Documentation is essential because it justifies the trustee’s careful, logical, skilful and impartial decision-making. Without it, decisions that seemed perfectly reasonable at the time of the action might have lacked judgment in retrospect. A trustee will rarely regret having documented a decision or communication, but may regret a lack of documentation.
The following are examples of decisions that should be carefully documented: (a) distribution decisions; (b) the decisions which define the investment policy; (c) the initiation or termination of investments and the hiring and firing of investment managers/funds; (d) allocation of principal and income; (e) verbal communications with beneficiaries; and (f) decisions to engage experts or agents (investment managers, lawyers, accountants). cIn our practice, we constantly ask ourselves what would we have liked to document if a beneficiary sued us ten years from now?