The legal complexities, risks and responsibilities of trusts can be daunting for experienced trustees to navigate. Therefore, it is not surprising that many non-professional trustees can find this new landscape overwhelming. Here are the top five tips to help non-professionals trustees understand their responsibilities and avoid typical pitfalls.
- Read the Trust
It may seem like obvious advice, but many non-professional trustees have not read the trust instrument. This is understandable as many trusts are long and use complex language that is not easily understood. After the trustee has taken the time to read the trust, if he/she still has difficulty understanding it, the trustee should ask the donor for supporting documentation. In many cases, a summary prepared by the drafting attorney is available and can be helpful in clarifying the terms of the trust instrument.
- Notify, Notify, Notify!
One of the pitfalls that non-professional trustees encounter involves notification to the beneficiaries. Often donors will not want their adult (but still immature) children or grandchildren to know about the trust, but the trustee is usually required under the terms of the trust instrument to send them statements. (Again, read the trust!)
At a minimum, adult beneficiaries and the guardians of minor beneficiaries generally have a right to know about the trust and receive an annual statement. A trustee who is making a significant or non-routine decision may also want to notify the beneficiaries in advance. For example, the beneficiaries should be notified if there are plans to sell a piece of real estate that comprises the majority of the value of the trust. Without notification, trustees cannot be released from liability for their actions.
- Know the Assets Like They Are Your Own . . . Because They Are
Another issue for non-professional trustees is that many do not understand the nature of the assets held by the trust or the investment policy for the trust. The trustee should talk to the investment and insurance advisors and use them as a resource. Conducting an annual review with the relevant advisors to discuss the holdings and the trust’s asset allocation is an important step to better understanding the assets in the trust and how they complement each other.
- Be Wary of Non-Marketable Assets and Concentrated Holdings
Once the trustee understands the assets held by the trust, it is important to identify non-marketable assets and concentrated holdings. The fact that the donor favors a particular stock or wants to continue to own an interest in the family business does not necessarily make it a prudent investment for the trust.
The non-professional trustee should consider the liquidity and concentration risks associated with these assets and decide if they are in the best interests of the trust and its beneficiaries.
- Honor the Donor’s Intent, but Don’t Follow Her/Him Blindly
Non-professional trustees may not understand what is involved in serving as a fiduciary. In some instances, they may simply take instructions from the creator of the trust. This can be complicated when the interests of the donor and the interests of the beneficiaries do not align. It is important to remember that non-professional trustees are not beholden to the donor (the trust creator). Instead, the trustee owes a fiduciary duty to the beneficiaries of the trust.
Ignoring that fiduciary duty can result in disharmony in the best cases and costly litigation in the worst.