In this second entry in our trustee series, we look at the duties a trustee must follow under state law. Here are the basics:
Duty to Follow Trust Document
Although perhaps it seems obvious, the trustee must follow the trust document. If there is any confusion, the trustee has to try to figure out what the grantor intended. So, a trustee must read (and re-read) the entire trust document to make sure she understands what the terms of the trust say. Then she has to follow those terms, even if they aren’t quite what she would have chosen herself.
Duty of Skill and Care
The law requires trustees to act with a high duty of skill and care. That’s true even if the trustee has never served as trustee before. So Crazy Uncle Larry, acting as trustee, must perform to the same standard as a professional trustee.
Duty to Communicate
The trustee must communicate with the beneficiaries and keep them reasonably informed about the trust. This includes providing the beneficiaries with information about the assets in the trust and their investment performance. Beneficiaries can request additional information and the trustee must provide reasonable responses.
Duty to Account
The trustee must provide the beneficiaries periodic accounting of the assets, debts, income, and expenses of the trust.
Duty to Not Delegate
The trustee can delegate many administrative duties, and may hire attorneys, accountants, or investment advisors. However, the trustee cannot delegate his or her ultimate decision-making responsibility. And, the trustee must maintain supervision over advisors and not blindly follow their advice. The grantor chose the trustee to be trustee – not the trustee’s accountant or attorney.
Duty of Loyalty/Duty to Avoid Conflict
The trustee must administer the trust solely for the benefit of the beneficiaries. Thus, the trustee may not use trust property for personal gain or take part in a transaction that benefits the trustee. So, the trustee may not purchase trust real estate for his own personal use, even if he pays fair market value, unless the trust document authorizes him to do so, or unless he gets permission from a court.
Duty to Segregate Assets
The trustee must keep trust assets separate from personal assets. Thus, a trustee may not deposit trust assets into her own personal bank account, but should instead establish accounts specifically to hold trust assets.
Duty of Impartiality
If there are multiple beneficiaries, the trustee must treat them impartially (unless the trust document provides otherwise). Thus, the trustee can’t allow one beneficiary to live in trust property rent free to the exclusion of other beneficiaries. Or, if the trust holds a vacation home, the trustee must make sure that each beneficiary is allowed to have equal use of the home.
Duty to Enforce and Defend Claims
The trustee must take reasonable steps to enforce claims on behalf of the trust and to defend claims against it. Thus, if someone owes the trust money, the trust must consider filing a lawsuit against that person. If the economic reality of the situation warrants the lawsuit, the trustee must sue.
Duty of Confidentiality
Grantors often create trusts in part to protect the confidentiality of the grantor and the beneficiaries. Thus, the trustee should be careful to keep the terms of the trust and the identity of the beneficiaries confidential.
Duty to Invest
The trustee must invest trust assets in an appropriate manner consistent with the goal of the particular trust. This duty includes diversifying investments and using appropriate asset allocations. The trustee must consider the financial needs and risk tolerance of the particular beneficiaries. For example, a trustee should avoid high-risk investments if the beneficiary is elderly and is dependent on the trust income for survival.
Next time, we will discuss trustee powers.
