Key Trustee Responsibilities
Trusts in Today’s Estate Planning World
Trusts are increasingly recommended by estate planning attorneys as an integral part of planning a family’s estate. Benefits are as varied as families and their assets, ranging from spendthrift, creditor, disability and divorce protection for beneficiaries to unifying control of the family’s assets to insure that the family’s estate and legacy passes intact to future generations. Likewise, estate tax savings become significant in larger estates.
The purpose of a trust can be as simple as avoiding probate and ensuring the confidentiality of a family’s plans or as complex as creating a family legacy that will transcend multiple generations. Complicated assets and diverse family situations add to the mix with multiple trusts which become longer and more complicated. The trustee’s role has expanded geometrically beyond what it was historically.
Fiduciary Requirements
When the creator of the trust has died or irrevocably transferred assets to the trust, and thus can no longer enforce the terms of the trust, the law imposes heavy responsibilities on the trustee, called a “fiduciary” standard. This is a much higher degree of care than an individual would use in handling his/her own accounts. Importantly, the trustee cannot self-deal with the trust assets or take financial advantage of the assets of the trust. In considering the purposes of the trust, the investments, and the distribution standards, the trustee has to consider not only the current beneficiaries, but also those that inherit after the current beneficiaries die.
Investments
A key responsibility of the trustee is to make the trust productive. The trust agreement will often have lengthy paragraphs (pages!) instructing a trustee how to invest and what investments to use. In addition the Uniform Prudent Investor Act may have specific criteria which the trustee must follow.
Investments of the trust, as a whole, must be considered in light of the overall risk and return the trust seeks. Diversification is a major consideration. The liquidity needs of the trust, its unique circumstances and the tax implications must likewise be considered. Ultimately the trustee must decide whether the risk assumed by the investments is appropriate to the goals of the Trust.
While investment responsibility can be delegated to professionals skilled in the particular area of investment, the trustee may have to regularly evaluate their performance and be sure to pay reasonable fees.
A thoughtful trustee will put together an investment policy statement which addresses each of criteria that will be used in making investments, share it with the beneficiaries and follow it.
Distributions
One of the most challenging tasks of a trustee is to determine the appropriate distributions from the trust to the beneficiaries. When the standard is clear and the beneficiary’s need is great, a trust still might not be able to support the request because the assets are insufficient. The trustee has to also look to the future and take into consideration probable growth and the future needs of the beneficiaries. When the standard is vague or is based on something like “standard of living,” the decisions are much more complicated and documentation is critical.
Tax Matters
Tax matters of the trust involve income taxes; capital gains taxes; estate, gift and generation-skipping taxes; interpreting partnership returns; and potentially, income taxes in multiple states. Trust tax rules can be unfamiliar and trust income is often taxed at the highest individual bracket. The challenge is both to minimize taxes at the trust level and (while keeping with the goals of the trust) distribute it to the beneficiaries who may be in lower brackets. While these decisions can make the trustee’s head swim, trust accounting for income and principal can be different than the tax treatment, leaving trustees to wonder “who is on first?”
Not all CPAs have a trust tax background. A trustee can be personally liable for some errors and it is critical for the trustee to be involved in the process and confident in the CPA’s abilities.
Reporting Obligations
These obligations include maintaining accurate records and providing reports to the beneficiaries when required or requested. Items to be reported include assets, liabilities, income, expenses, and distributions. Brokerage statements or tax related K-1s are not sufficient. Events which are material or significant to the trust must also be disclosed to the beneficiary.
Principal, which comprises the original assets, and the ongoing transactions as these are bought and sold, must be accounted for separately from the income (dividends, interest, rent, and the like). The differences between principal and income are not always clear. Because of the complexity most states have adopted a version of the Uniform Principal and Income Act to assure uniformity.
When meetings are held, agendas and minutes go a long way in protecting the trustee (memories fade and change over time). Real estate is all about location. In the trust world, it is all about documentation. So, document, document, and document.
