Anyone who is appointed and acts as Trustee may quickly learn that there is potential liability lurking around every corner. Serving as a Trustee can be a thankless job. Here are some special problems that a Trustee should be aware of when accepting an appointment and beginning any trust administration.
As you are attempting to marshal assets in the Trust, you may discover that assets are not titled in the Trust. In that case, it will be very important to review these assets with your attorney and determine if the asset is listed in the schedule of assets and/or is under $150,000. If so, there are tools that may be used to avoid probate and marshal the assets into Trust including:
Hegstead Petitions: PC 850
Spousal Property Petition: PC 13500-13650
Probate Code Section 13100 Affidavit
Many trustees disregard their duties to beneficiaries or are simply too arrogant to take the time to educate themselves on what is required of them. Don’t let the power flow to your head. Be cognizant of your fiduciary duties to communicate, share information and for an accounting.
A Trustee must account to the beneficiaries. Some trusts relieve from the duty to account in some circumstances. However, Trustee MUST ALWAYS provide information to beneficiaries upon their request … at least enough so they are able to protect their interests.
Disclosing information to the beneficiaries may protect form future liability if the court finds that the beneficiaries sat on their rights.
Trustees who fail to keep proper records can be held liable for breach of fiduciary duty, contempt, damages, and possibly attorney’s fees. There are three general purposes: tax returns; accounts to court/beneficiaries; investment/tax planning.
Make sure that you are keeping track of expenses and receipts in ledge format. Be sure to track financial assets other than cash, including stocks.
Additional Important legal files to marshal:
Bank and brokerage account statements
Insurance of any type
Contracts, property management agreements, lease files
Medical and health records
Loans, mortgages, notes payable, other recurring bills
Be cautious regarding cash distribution. Cash can often times result in zero documentation and therefore, zero protection for the Trustee. Try to use checks, credit cards, and create receipts for cash distributions.
A Trustee should maintain records for at least 5 years, if not indefinitely (where trust still continues, e.g., change of trustee).
A Trustee is required to inventory and appraise EACH asset of the trust. Beneficiaries will ask you where the missing items are – diamond rings and other valuable jewelry often disappears. Using a professional appraiser will assist in tracking such items.
A Trustee is entitled to compensation according to the terms of the trust. However, a lay person acting as Trustee is not entitled to the same fees that may be charged by a professional trust company. Be aware that beneficiaries will challenge premature payments. They will contend compensation is not “reasonable compensation”.
Be sure to keep good records of time spent on Trust matters so that you can justify your compensation later and demonstrate that they are in fact “reasonable.”
A Trustee is required to comply with the “prudent investor rule.” Risky investments are sometimes held too long, resulting in a loss to the trust, for which the Trustee may be liable.
Immediately assess the nature and volatility of the investments in the portfolio. Mom or Dad had the right to maintain assets in a non-diverse manner and take risk in investing in one stock predominantly. As the Successor Trustee, you do not have the same rights and you have a fiduciary duty to diversify the portfolio and manage the risk of loss.
A Trustee is required to act with diligence to carry out the terms of the trust. Delay in getting account statements and information from third parties is NOT an excuse – you are supposed to select third-party vendors who are competent and act with reasonable care. Supervise and manage all third parties, and keep things on track.
A Trustee is required to select agents who are competent. A bad lawyer can compound a small problem by giving bad advice, and making it a big problem. Even though the Trustee relied upon counsel, many courts will NOT find this a valid excuse. Work with competent professionals who come with references and E&O insurance.
A Trustee is required to act independently and not self-deal. Taking personal advantage of a situation by using trust property – even while keeping it maintained – can violate duties of self-dealing and loyalty. Although mom or dad may have allowed you to live rent free in their property for upwards of 10-20 years, you do not have that same privilege now that you are acting as a fiduciary. You now have the duty to maximize that asset for the benefit of all. Fair rentals on property owned by the trust should be recovered, even if leased to family members. PC Section 16007.
The Trustee owes each beneficiary a “duty of impartiality”. Giving one beneficiary a different item, or different treatment, than others – even if “fair” – may trigger a dispute. Be sure to make equal distributions to all anytime a preliminary distribution is being made so that you are not accused of being biased.
California has statutes governing how Notice must be sent, accountings must be prepared and filed, etc. The required notices begin timelines and other deadlines for contesting the trust, disputing a trustee’s action, or challenging items on an accounting. Don’t assume that because you have provided copies of documents and statements to beneficiaries that you have complied with these strict notice requirements in the Probate Code.
Trusts are for beneficiaries, not Trustees. Sometimes Trustees will incur expenses that barely have a benefit (and sometimes no benefit) for the beneficiaries. For example, paying rent on a vacant apartment can trigger surcharge against the Trustee/Conservator. Paying storage charges for tangible personal items (exercise equipment, boats, trailers, cars) that the beneficiary has no change of ever using again can trigger a surcharge.
All of the above may seem daunting when you realize the fiduciary duties that are attached with serving as a Trustee. At TLD Law, we routinely assist clients through the trust administration process and work diligently to protect all fiduciaries from liability.
Author – Monica Goel, Esq. A Certified Specialist in Estate Planning, Trusts, and Probate