by Jonathan A. Nelson
We recently talked about helpful steps to get started as a trustee. Below are a few things to watch out for; getting them wrong can have big consequences. Note that this list is going after the inadvertent or inexperienced mistakes, not intentional misdeeds.
Delay getting set up. There can be a lot of paperwork and time needed in the early steps as trustee, especially dealing with financial institutions and sending notices. The trustee is responsible for what happens to Trust assets if they aren’t promptly secured (including the bank account Shifty Eddie has a debit card to or the high-risk investments Uncle Fred talked mom into making). Sometimes a little step – like getting family tree information – is needed for another time sensitive step, like mandatory sending of notices to the people on that family tree. Delays can compound, so it is important to act early.
Inadequate document retention. The trustee needs a good grasp on what he is managing and the ability to act quickly. There are processes to follow and forms to submit. There will be periodic tax requirements. There may be (as is the case in Virginia) unwaivable obligations on the trustee to provide a lot of information to beneficiaries whenever requested. These duties use information which can be relatively easy to provide if the trustee maintains his or her accounting information in good order, but which can be a nightmare to try and recreate down the road. Worse, if the trustee can’t produce the required records (e.g., documentation supporting the expenses underlying a reimbursement to the trustee), the trustee may be liable for paying back the trust from his or her personal funds.
Hiding the ball. Disclosures and notices are there for good reasons, and have an added benefit of helping the trustee communicate and build trust with the beneficiaries. This is even true when working through inadvertent errors or mistakes – a trustee fixing something right away is often met with good will and avoidance or waiver of additional consequences. Something as simple as obtaining authorization beforehand for a grey area (like selling an asset to a family member) usually helps the trustee keep the confidence of the beneficiaries.
Unauthorized disclosures. The trust instrument gives the trustee his or her marching orders. Sometimes this includes direction for information to be withheld or kept confidential. A beneficiary’s spouse who is about to leave them may try to figure out what hasn’t been distributed yet; a beneficiary’s creditor may make aggressive threats even though the trust has a valid spendthrift clause. The trustee must be aware of these instructions, because giving information improperly can make the trustee liable for beneficiary losses that come from that disclosure.
Mistiming transactions. Even leaving aside timing for mandatory distributions, making things happen at the right time is important. A few examples: Failing to distribute income or incur administrative expenses in the same tax year as the income it relates to can result in the trust having to pay unnecessary taxes. Failing to get forms to beneficiaries early enough for them to file their own taxes can create problems for them individually. Failing to take a fiduciary fee at the right time can lead to the trustee losing that fee.
Commingling assets. Depending on the nature of the trust, there may be multiple subtrusts, business entities owned by the trust (for instance, an LLC holding a rental condo), other related trusts with the same trustee, or individual and estate accounts that are not in the trust. Some of these can be held in a single account, others cannot, and all involve keeping the separate accountings up to date. Even if money is needed to avoid losses in one subtrust (e.g., replace the roof on a house), it may not be as easy as just moving it from another account and calling it a loan.
Losing sight of the purpose of the trust. The previous six missteps may sound like the job of a trustee is rigid, but this is the balance to that: one reason the living, thinking trustee is there is because not everything goes according to plan. If the trust assumed there would be enough money to pay for college and to keep up the house, or didn’t anticipate a beneficiary’s mental illness, or faces an unanticipated tax bill because of a legislative change, the trustee may need to be proactive in seeking a modification of the trust to meet this new challenge. Sometimes this happens through a court, sometimes by an agreement of the beneficiaries, and sometimes that power is granted to the trustee by the trust. But in every case, the responsibility of the trustee is to look after the needs and interests of the beneficiaries, not just follow instructions.
Sound difficult? It can be, and it is important to have the right legal and accounting advisors to guide you in understanding your state’s laws and your duties under the governing document.
Next in the Fiduciary Boot Camp series: What are the “Fiduciary Duties?” Are They Different for Executors, Trustees, Conservators, or Custodians?
Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.
The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.