The 4-1-1 – Administering your First Trust
You just found out you’ve been named trustee of your nephew’s trust — now what? Do you need to hire an attorney to assist you in determining what your obligations are as trustee? Should other professionals be involved? How do you comply with your duties and obligations? Can you be held liable for making a mistake? Do you have to accept the position? Will you get paid? What about reimbursement for expenses? Will accepting this appointment strain your relationship with your nephew?
The first place to start when answering these questions is with a copy of the trust document itself. A trustee’s duties are dictated by the trust instrument, the Texas Trust Code and common law. In general, a trustee has an obligation to administer the trust in good faith, according to the terms of the trust, or where terms are lacking, according to the default provisions set out in the Texas Trust Code. Additionally, trustees owe certain fiduciary duties to beneficiaries. Specifically, a trustee owes the beneficiary a duty of loyalty, duty to furnish information, duty of care and a duty of impartiality.
Duty of Loyalty – a trustee must always put the interest of the beneficiary ahead of his own. This means unless the trust provides otherwise, that a trustee may not engage in self-dealing. By way of example, a trustee may not borrow money from the trust and then loan or give that money to friends or to a business that he has a substantial interest in.
Duty to Furnish Information – a trustee must keep the beneficiary reasonably informed of material facts that may affect the beneficiary’s rights under the trust. The fastest way for a trustee to find himself in a lawsuit is by refusing to talk to the beneficiary about the dealings of the trust. Sometimes this happens because of egos, sometimes it is inadvertent, sometimes it’s purposeful – in any case, the beneficiary will be left feeling like the trustee is hiding information. Keeping an open line of communication with the beneficiary will go a long way to avoiding an unnecessary lawsuit.
Duty of Care – a trustee has a duty to administer a trust with care, prudence and diligence. Generally, this comes down to a trustee acting with respect to trust property the same way he would act if the property were his own. If the trustee has some special skills or expertise, say he is a financial advisor or investor, then he will be held to a higher standard if there is ever a dispute that he has breached his duty of care.
Duty of Impartiality – a trustee cannot favor one beneficiary over another when he is administering a trust that belongs to multiple beneficiaries. Rather, a trustee must take into account each beneficiary’s unique set of circumstances and needs when administering the trust.
While the person who created the trust may discharge a trustee from complying with many of the statutory and common law duties otherwise imposed, he may not waive a trustee’s duty in three specific instances. First, a trustee always has a duty to respond to a demand for an accounting from a primary beneficiary. A beneficiary may demand that the trustee provide an accounting and by statute the accounting is due within ninety days of such request. If a trustee fails to respond, such failure is a basis for his removal. Second, a trustee has a duty to act in good faith in accordance with the trust terms. Acts of bad faith and failure to comply with the trust terms will also provide a basis for removal of a trustee under the Texas Trust Code. Finally, a trustee has a duty to keep beneficiaries age 25 and over reasonably informed. If a trustee fails to comply with any of these mandatory duties, it will not be a valid defense to claim that the trust instrument waived such duties.
What about mistakes? Can a trustee be held liable for making mistakes administering the trust? Again, the trust instrument will control the determination of what rises to the level of actionable conduct; however, that may not stop the beneficiary from suing the trustee for an act that the beneficiary believes has resulted in a breach of trust. If the trustee is sued, can he use trust funds to pay his attorney’s fees? If there is no guidance in the trust instrument itself, the law is murky here. Whether or not a trustee may recover attorney’s fees for defending claims against a breach of trust will likely depend on whether the trustee is found liable for negligent or intentional behavior and if he acted in bad faith.
Now that you understand the parameters of your duties and obligations, what about the practicalities of administering the trust? Is this pro bono work or will you get paid? What about all of the expenses you are racking up traveling to meet with CPAs, financial advisors, attorneys and other professionals in order to properly administer the trust? What about the fees you are paying these professionals – where do they come from?
Being a trustee can be a full-time job on any given day. If the trust instrument does not provide for compensation, the Texas Trust Code provides a mechanism for the trustee to pay himself “reasonable compensation” from the trust estate. If the trustee is going to “self-determine” what his compensation should be under this statutory scheme, it’s best practice to have the trustee disclose his compensation and have all of the beneficiaries sign off on it in order to avoid future lawsuits on the issue. Most trusts provide for reimbursement of reasonable expenses from the trust estate. However, if yours doesn’t, the Texas Trust Code provides a general right to reimbursement for funds expended by the trustee in the administration of the trust.
What about the professionals you need to engage to assist you in managing and administering the trust? Typically, the trust instrument will provide that fees paid to other professionals are expenses that should be incurred by the trust. However, if your trust instrument is silent, the Texas Trust Code specifically allows a trustee to employ attorneys, accountants, agents, including investment agents, and brokers reasonably necessary in the administration of the trust estate. If challenged by a beneficiary, the court will have to determine whether the professional employed was reasonable and necessary to the administration of the trust. If the answer to this inquiry is no, the trustee may be required to reimburse the trust for the funds he expended on these services.
In addition to the legal issues that will frame a trustee’s job, there are also many non-legal issues a nominated trustee should consider before accepting his position. Will you have enough “free” time to properly administer the trust? What type of assets are involved and are you comfortable handling those assets or hiring professionals who can assist you? Are you detailed enough to keep up with the accounting demands of the trust or will you need to hire a professional to assist you? What is your comfort level with the duties and obligations that are set out in the trust instrument? Will you be able to tell a beneficiary “no” if you need to? What is your relationship like with the beneficiary? Does the beneficiary have any special issues that may make the trust administration difficult (e.g. substance abuse issues, marital issues, spending issues) and are you up for that challenge?